Uncertainty looms as to what decisions members of the Organization of Petroleum Exporting Countries' (OPEC) and its allies will make at the OPEC meeting this week specifically on whether they will choose to extend their production cut agreement or make deeper cuts to their output levels.
Saudi Arabia-led OPEC and Russia-led non-OPEC will meet in Vienna, Austria on Dec. 5-6 for their semi-annual ministerial meeting to discuss the glut of supply in the global oil market and low global oil demand in the hope of finding a market balance to support crude prices.
Some experts believe the group, dubbed as OPEC+, will extend their production cut agreement until mid-2020. The group collectively lowered their output level by a total of 1.2 million barrels per day (bpd) in December 2018 and later extended this until the end of March 2020.
Another group of experts, on the other hand, argue that the only way for OPEC to support crude prices is through making deeper cuts to their current oil production level.
- Extending the deal
Caroline Bain, a chief commodities economist at London-based Capital Economics, told Anadolu Agency on Tuesday that she does not expect OPEC to deepen cuts. She bases this view on the likelihood that the burden of the cuts would fall on Saudi Arabia, the country that has cut far more than its quota and which is unlikely to want to make any further concessions.
As part of the deal in December 2018, OPEC agreed to lower its total output by 800,000 bpd with Saudi Arabia absorbing most of this cut by curbing its supply by 500,000 bpd.
According to Bain, OPEC is mostly concerned about its members' compliance with their individual output quotas at the moment, as some members are producing far more crude oil than their quota allows.
"They [OPEC members] are more likely to put pressure on Iraq and Nigeria that haven't been obeying their quotas. If the Saudis push for deeper cuts, I think it would be more because they are concerned about global oil demand," Bain said.
"At this point, they [OPEC members] are probably quite concerned about loss of market share," she added.
Since oil prices started recovering in mid-2016 from the great slump in 2014, OPEC has been losing market share to American shale oil producers. The U.S.' crude oil output reached a record high level of 12.9 million bpd for the week ending Nov. 22, according to the U.S. Energy Information Administration data.
Russia, non-OPEC's leader in oil production, is also one of the countries that have not adhered to its quota. The country needs natural gas output from oil wells, some of which cannot be shut down because of the possibility of the wells and pipelines freezing and causing infrastructure damage.
"Russia has been producing more than its quota. We certainly don't see them calling for deeper cuts," Bain said.
"I don't think the market is expecting deeper cuts from OPEC nor Russia. There would be a fairly muted reaction [from oil market and prices] if they extend the current cuts," she said.
- Deepening output cuts
Under a second scenario in which OPEC would need to make deeper cuts to their current oil production level to support crude oil prices, Rystad Energy Business Development Manager Efe Bulduk told Anadolu Agency that their latest forecasts suggest that OPEC essentially has no choice but to meaningfully cut production at the start of next year if it wants to ensure a stable oil market with no price deterioration next year.
OPEC's crude oil production estimate for the fourth quarter of 2019 is 29.6 million bpd while Rystad Energy's latest revision to supply and demand shows that global crude oil demand for OPEC's supply is expected to be 28.6 million bpd in 2020.
According to Bulduk, this would ensure that crude oil prices remain steady around the $60 per barrel range.
However, he added if OPEC wants to boost oil prices then it needs to make deeper cuts in its production.
"We have to keep in mind what kind of reaction countries outside OPEC would have to a production cut, such as China, Brazil, Guyana, Russia and the U.S.," he said.
"In order to raise oil prices to $70 a barrel range, OPEC needs to cut its production level by more than 1.5 million bpd," he added.
"Under the current circumstances, OPEC needs to make an additional output cut by the beginning of 2020, if it wants a stable oil market and if the market does not want to see oil prices falling further," he concluded.
By Ovunc Kutlu and Nuran Erkul Kaya