Bloomberg/ Vienna, London
Opec+ said it will adjust its output target and redistribute production cuts between its members.
The group, which pumps more than half the world’s oil, agreed in Vienna yesterday to reduce its output target by 500,000 barrels a day, said delegates, bringing it in line with recent production levels.
After days of rumour and mixed messages that whipsawed prices, the shape of the adjusted deal between the Organisation of Petroleum Exporting Countries and its allies gradually emerged. Oil futures fell in New York yesterday as it became clearer that the group wasn’t planning to remove any additional barrels from the market.
Instead, delegates said it would rejig its deal to formalise the extra supply reductions some of its members have already been making for most of the year. Then it would share them out more equitably among the countries that have consistently failed to meet their targets.
“This is housekeeping,” said Roger Diwan, the veteran Opec watcher at consultant IHS Markit Ltd, who’s in Vienna monitoring the meeting. “Opec is re-adjusting its production quotas.”
Under the new deal, the size of the Opec+ daily production cuts target will be increased from 1.2mn barrels to 1.7mn barrels, compared to a baseline of October 2018, according to ministers including Russia’s Alexander Novak and Iran’s Bijan Namdar Zanganeh. That doesn’t require the group as a whole to pump less oil, since it was already implementing an additional cut of that size in October 2019.
Angola, Azerbaijan and Mexico have simply been unable to sustain their production due to natural declines.
The “adjustment cannot really be interpreted as something that effectively changes the expected oil balance,” consultant JBC Energy GmbH said in a note. “It is more of a compliance manoeuvre and an effort to distribute the over-compliance by some members that has been in place since about April to other Opec+ members. The target will only come into force if all members of Opec+ implement 100% of their pledged curbs, Novak said in a Bloomberg TV interview on Thursday. That’s something the alliance has struggled to achieve throughout the three years of its existence, with some countries such as Iraq actually increasing output after promising to cut.
Those nations that have failed to make their pledged cuts may have to reduce their current output under the adjusted agreement. The new target for Iraq was a particular sticking point during the six hours of talks on Thursday, delegates said. Opec+ ministers were in the process of finalising each country’s new quotas, said a delegate.
“The ruckus reflects pushback by producers facing stronger pressure than in the past to comply and contribute real, voluntary cuts,” said Bob McNally, president of Rapidan Energy Group and a former oil official at the White House under President George W Bush.
For Russia, which has achieved its targeted cuts in just three months this year, full compliance got easier on Thursday as Opec agreed to exclude a very light oil called condensate from the country’s quota. Novak had argued that a recent increase in production of that hydrocarbon, which is extracted from natural gas fields, was the only reason Russia was falling short of its pledge.
The new 500,000 barrel-a-day quota reduction will only apply in the first quarter of 2020, said Novak. The group will hold an extraordinary meeting in March to discuss what to do next, said a delegate.
Those talks could coincide with a tricky patch for the oil market. Demand growth is slowing and another big expansion in rival production is coming down the pipeline. Together those factors could create another oversupply that drives international prices back down toward $50 a barrel.
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