OPEC surprises oil markets with deeper supply cut

OPEC and allied oil exporters took financial markets
by surprise on Friday with a deeper-than-expected cut in oil supply, triggering
a jump in prices.
The move by OPEC and friends tightens their grip
over global oil markets as they prepare for a new wave of production from rival
producers next year.
Oil prices surged following the announcement, with
US benchmark WTI and its European counterpart Brent both nearly two percent
higher shortly after 1500 GMT.
“This deal puts a floor under prices and sets the
stage for higher prices as the economic environment improves,” said Gary Ross,
CEO of Black Gold Investors.
The new squeeze on exports will remove another
500,000 barrels a day from world markets from next month, according to a
statement issued after the meeting. This comes on top of an existing deal to
reduce supply by 1.2 million bpd from October 2018 levels.
Analysts said the agreement was complicated by the
fact that Saudi Arabia, OPEC’s linchpin, was already producing 400,000 barrels
per day less than it had committed to under the earlier deal. Energy Minister
Prince Abdulaziz bin Salman made clear at the press conference that the Kingdom
would continue to pump below its allotted quota, and was now targeting a level
of 9.744 million barrels per day.
“We will be contributing to the new cut by 167
(thousand barrels per day)… We will continue a voluntary cut of 400 (thousand
barrels per day) which makes a total of 2.1 million barrels of cuts that these
24 countries have agreed,” Prince Abdulaziz said.
Prince Abdulaziz explained that Saudi Arabia was
fulfilling its role as the world’s swing oil producer.
“The world expects us to behave and act -- as we
have always been with the world economy -- we have always been a responsible
and responsive producer. We do it both ways. When the world requires additional
production, we come first to proffer that urgent need, and when the market
requires some stabilization we also come to the aid of the market and we do
that voluntarily,” he said.
OPEC and its allies will hold an extraordinary
meeting on 5 March next year, three months before the next scheduled meeting,
it said in the statement. This demonstrates the group’s readiness to take
further measures if needed to keep markets stable, Prince Abdulaziz said.
The Organisation of the Petroleum Exporting Countries
(OPEC) has managed to keep world markets relatively stable, between $50 and $75
a barrel, for the past three years through a deal with non-OPEC countries
including Russia, Kazakhstan, Oman and Mexico.
The current range appears to represent a middle ground
between the needs of consumers for affordable fuel on the one hand and the
needs of producers – whether they are governments or private companies – on the
other.
The US alone, which re-emerged as the world’s
largest oil producer last year, has seen its output explode thanks to
innovations in fracking technology over the past decade. America is expected to
add more than a million barrels per day in new production next year, having
added more than a million in the past 12 months. With more barrels also expected
from Brazil, Norway and Guyana, countries outside OPEC are due to add a
whopping 2.3 million barrels a day next year, according to the International
Energy Agency. This is more than double the expected growth in demand for oil
and so OPEC and friends are adjusting to keep prices from falling.
However, optimism is high among oil producers that a
trade deal between the US and China might provide a boost to growth in 2020.
Ross of Black Gold Investors said oil prices were
poised to move higher on the back of OPEC’s positive approach to market
management: “We are still stuck in a range of $60-$65 per barrel for Brent, but
the next move will be towards $65-$70,” he said.