By Ovunc Kutlu
Production cuts of the Organization of Petroleum Exporting Countries (OPEC) and its allies will be inadequate to push prices higher, which have only shown limited gains so far.
The cartel and its allies, dubbed as OPEC+, announced on Dec. 7 that they would curb their production by a total of 1.2 million barrels per day (
On Dec. 7, International benchmark Brent crude rose by 2.7 percent, and American benchmark West Texas Intermediate (WTI) increased 2.2 percent, but on Dec. 10 both benchmarks lost these gains.
As of Dec. 14, Brent crude was fluctuating at around $60 per barrel, while WTI saw prices of around $52 a barrel.
The global oil market and investors will closely watch each group's compliance with the supply cut agreement in the first half of 2019 - a factor that is vital for the direction of pricing trends.
Low price estimates
While crude prices showed only limited gains after the announcement of OPEC+ supply cuts, many experts have declared a bearish outlook for oil prices.
U.S. multinational investment bank and financial services firm Morgan Stanley said on Dec. 10 that it lowered its oil price forecast by $10 a barrel for next year.
The firm said it now expects Brent crude to average $68.50 per barrel in 2019, down from its previous estimate of $78.50.
Morgan Stanley said in a note that OPEC+ curbing production would have a calming effect over concerns of a supply glut in the global market, but the bank also determined that the oil cut deal would have a limited impact on oil prices.
On Dec. 11, the EIA has also revised down its oil price forecast for 2019 by $11 per barrel.
It said Brent oil is estimated to average $61 a barrel next year, down from the previous forecast of $72 per barrel. WTI is forecast to average $54 per barrel in 2019 compared to the previous projection of $65 a barrel.
On the demand side, "concerns about the pace of global economic growth in coming months have led to related concerns about the pace of oil demand growth," the EIA said in its Short-Term Energy Outlook (STEO) report for December.
Many investors are worried that global economic growth would slow in 2019, causing lower oil demand next year.
The Organization for Economic Cooperation and Development on Nov. 21 lowered its global growth estimate for 2019 to 3.5 percent, from its previous estimate of 3.7 percent, citing "trade conflicts."
The International Monetary Fund on Oct. 8 also had lowered its forecast for global economic growth for 2019 to 3.7 percent, from its earlier estimate of 3.9 percent.
How will OPEC+ cut happen?
While Saudi-led OPEC will decrease its total production by 800,000 barrels per day (
Russian Energy Minister Alexander Novak said on Dec. 12 that his country would initially reduce production by at least 50,000 to 60,000
Novak, however, told reporters after the conclusion of OPEC+ meeting on Dec. 7 that Russian crude oil production reached 11.4 million
While Russia's initial cut in January will be around 55,000
Seasonal constraints already make it hard for Russia to trim its output during the winter, explained Novak on Wednesday, Dec. 12. "For us it is much more difficult to cut than for other countries, stemming from our climatic conditions. That is a specific characteristic of our oil production sector," Russian news agency Interfax quoted Novak as saying.
With Russia lowering its production by 228,000
Apart from Russia, the volumes of output cuts from the remaining non-OPEC members are yet unknown.
Cutting more than total share?
Most of OPEC's 800,000
Energy Minister Khalid al-Falih told reporters on Dec. 7 after the conclusion of OPEC+ meeting that his country's crude production stood at 10.7
OPEC said on Dec. 7 that Iran, Venezuela
This will mean that 10 countries out of the 15-member OPEC cartel are left to distribute the remaining 300,000
The President of the 175th OPEC Conference and the United Arab Emirates Oil Minister Suhail Mohamed Al Mazrouei said on Oct. 7 that the remaining members of the cartel would cut production by about 2.5 percent from their October levels.
However, the announced 2.5 percent cut would result in the remaining 10 members of OPEC cutting more than their total share of 300,000
How will OPEC members distribute the cut?
Iraq produced 4.46 million
However, Iraqi Oil Minister Samir Gazban said on Dec. 9 that the second biggest producer of OPEC would lower its output by 139,000
The United Arab Emirates produced 3.27 million
While Kuwait's output was 2.73 million
The 2.5 percent cut from October 2018 levels for other countries, based on direct communication data from the report, means Nigeria will lower its output by 40,000, Angola by 36,000
That would take the total production cut of OPEC's 10 members to 418,900
When Saudi's cut of 500,000
However, Saudi Arabia's oil production was around 10.64 million
This amount, combined with 418,900
It is possible that small- and medium-sized OPEC producers could trim their outputs less, compared to bigger producers such as Iraq, Kuwait, and the United Arab Emirates.
Saudi Arabia is a swing producer that can increase and decrease its oil production rapidly in the face of market dynamics and price fluctuations. Small OPEC countries, on the other hand, have less flexibility to make changes to their output levels rapidly.
It is more likely that OPEC would limit its supply cut to a total of 800,000
With these supply cuts, OPEC wants to increase oil prices; however, if too many cuts are made, member countries would lose out in terms of lost revenue.