OPEC Meeting

Omar Abdelrahman, Economist | 416-734-2873

Date Published: December 5, 2019

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OPEC+ agree to deepen existing production cuts by 500K bpd beginning in 2020Q1 

  • The 177th OPEC Conference and the 7th ministerial meeting between OPEC and non-OPEC countries ended earlier today with participants agreeing to reduce overall production by an additional 500K barrels per day, effective January 2020. 
  • This builds on the existing 1.2 million barrels per day cut agreement in place since the beginning of the year, and therefore brings total production cuts to 1.7 million barrels per day, equivalent to keeping about 1.7% of current global supply off the market.
  • OPEC+ will meet again in March 2020 to review the deal and how market balances have evolved. Compliance has been a key sticking point for Saudi Arabia, which has had to reduce output to offset non-compliance by other members such as Russia, Iraq, and Nigeria.
  • Full ratification of the deal as well as the apportionment of the new cuts is expected tomorrow, and should include a commitment to 100% compliance by all signees. As expected, OPEC has agreed to allow OPEC+ partners like Russia to exclude condensate from their oil output calculations.

Key Implications

  • Price reaction was fairly muted, with both WTI and Brent almost flat on the day. Part of this is due to how expectations evolved broadly in line with the announced decision over the past few days. However, the fact that OPEC production has already undershot existing production quotes of late means that this agreement may have little impact on supply balances going forward. There are also concerns on whether the deal will hold ahead given previously telegraphed compliance concerns. 
  • Existing supply cuts helped prevent overproduction in 2019 and served to leave markets in roughly balanced territory. That said, today's decision comes as oil markets face headwinds from subdued global demand growth and increasing non-OPEC+ supplies from the United States, Norway, and Canada. All told, we believe that some downside risk remains on oil prices at the start of 2020 as global demand bottoms out and new non-OPEC+ supply becomes available, but after that we expect WTI oil to hold within the US $55-$60 range. 
  • U.S. shale investment has been in persistent decline since late 2018, as companies grapple with low oil prices and pressure to maintain capital discipline. Total U.S. domestic crude oil production is still growing, and the EIA is still forecasting a 1 million bpd increase in 2020. Much of this, however, will depend on how prices evolve in the next few quarters.