The Organization of Petroleum Exporting Countries (OPEC) held their second semi-annual meeting in Vienna, Austria on December 6-7, with the market anticipating the cartel to cut production to bring global supply and demand closer to a state of equilibrium. The cartel – along with Russia and its allies – left the assembly with an agreement to cut crude production by an aggregate 1.2 million barrels per day (mmbd) in 2019, with a meeting scheduled in April to discuss current market conditions. Due to economic uncertainty, Iran, Libya, Venezuela, and Nigeria received exemptions from the mandated cuts altogether. The cuts will be dispersed as follows:
- OPEC participants will curb production by 0.8 mmbd, of which de facto leader Saudi Arabia will be responsible for 0.25 mmbd and Iraq accounting for 0.14 mmbd, respectively
- Russia will reduce production by 0.23 mmbd
- A coalition of additional producers will cut the remaining 0.17 mmbd barrels required under the new quota
In the months leading up to renewed sanctions on Iranian exports, concerns of tight oil supply put substantial upward price pressure on crude oil and refined products, before market sentiment shifted in November. Strong production gains by the United States, Russia, and Saudi Arabia – the three largest oil producers in the world -, inventory builds, and Iranian sanction waivers alleviated much of the perceived price pressure ahead of Iranian sanctions coming to fruition. Consequently, crude oil entered a bear market on concerns of an oil market in surplus through 2019 – reinforcing the significance of OPEC’s decision – as the cartel’s production stance will likely drive market behavior in the year ahead.
The chart below uses an October 1 baseline to measure diesel price behavior since oil prices reached four year-highs on October 4 and fell to thirteen-month lows at the end of November. In the said timeframe, diesel prices have plummeted 52 cents per gallon, largely due to the oil market’s largest fall since the 2007 financial crisis in November.
Forecasts released by the International Energy Agency (IEA) prior to OPEC’s announcement reveal a drastic surplus in the global oil market, assuming current production levels held true through 2019. However, the agreement to cut output by 1.2 mmbd now brings supply and demand closer to balance, as depicted in the charts below. An oil market in surplus in 2019 would likely have continued to support the bearish oil prices experienced in November, while the notable supply adjustment will likely assist rebounding prices in the coming months. Russia expects the production cuts to be gradual over the course of several months, however Saudi Arabia has made it clear they will adjust production levels according to the market’s response.
Following the accord, the West Texas Intermediate (WTI) and Brent benchmarks rebounded, with WTI prices increasing approximately 2.2 percent to $52.61 per barrel and Brent prices rising approximately 2.7 percent to $61.67 per barrel. This upward behavior has proven infrequent in recent months, with supply-side market dynamics driving diesel prices downward. OPEC’s announcement will play a large role in energy prices regaining strength in 2019, as the political power of the cartel’s energy assets continues to trigger price volatility in transportation supply chains. The Applied Knowledge Team will continue to monitor the global marketplace and provide insight into major price drivers as the market adapts to OPEC’s announcement.
If you have any questions on the recent OPEC announcement or its impact to diesel prices, please contact the Applied Knowledge Team at AppliedKnowledge@breakthroughfuel.com.