The Organization of Petroleum Exporting Countries and its allies (OPEC+) agreed to deepen production cuts at their semi-annual meeting in Vienna, Austria on December 5th and 6th. The group plans to remove an additional 500,000 barrels of supply per day, increasing the aggregate quota to 1.7 million barrels per day from October 2018 output levels. Reports indicate OPEC participants will absorb 340,000 barrels of the daily extension, while non-OPEC affiliates – like Russia – will be responsible for the remaining 160,000 barrels. The cuts are expected to last through March 2020, with the objective of bringing the market closer to balance to buoy oil prices. The decision was encouraged by U.S. production growth and a bleaker demand outlook that left the state of crude prices in the first part of 2020 uncertain. The energy alliance said it plans to review the policy at a meeting on March 5th and 6th.
Based on average production levels through November 2019, OPEC+ fell about 180,000 barrels per day below the annual target. Saudi Arabia’s aggressiveness fueled this outcome and mitigated the lack of alignment from other key producers throughout the year, as did disrupted supply resulting from September’s attacks on Saudi oil fields. The group will need to remove about 300,000 more barrels to comply with the target announced on December 6th based on production averages through November.
This announcement came as a bit of a surprise, considering prior sentiment widely indicated the group – which accounts for about half of world oil production – would not deepen cuts. Instead, many thought OPEC delegates would focus more on compliance with the original pact. However, in addition to the looming downside market forces heading into 2020, the initial public offering (IPO) of Saudi Arabia’s state-owned oil company, Saudi Aramco, pressured officials to proactively help support oil prices. Saudi Aramco’s IPO earned the world’s largest-ever valuation at $1.7 trillion, though fell short of the $2.0 trillion target sought by Saudi Crown Prince Mohammed bin Salman.
Impact on Crude Oil and Diesel Prices
Historically inconsistent compliance across the 24 member nations leaves the true supply impact of this decision in question. Saudi Arabia seems to be one of the only producers frequently adhering to their respective quota and has single-handedly allowed OPEC to remain at or below its collective target for much of 2019. However, other producers’ lack of compliance could mean the new agreement simply brings member nations closer to levels they should have achieved in 2019. Increasing the aggressiveness of the group’s cuts will more than likely stabilize crude oil prices and lessen the downside risk previously thought to be in store for the first part of 2020, rather than inject any significant upward price pressure into crude oil and diesel markets.
Diesel spot market prices closed Thursday, December 5th between $0.005 and $0.01 per gallon higher than the prior day’s close, while WTI and Brent crude oil prices saw increases less than $0.50 per barrel following the agreement among OPEC nations to deepen cuts. When the rest of the OPEC+ group convened the following day to finalize their support of this strategy, energy prices showed a similar, subdued response as the day prior. As of early Friday afternoon, on December 6th, diesel prices were up between $0.01 and $0.02 per gallon, while WTI and Brent crude prices showed respective increases between $0.50 and $1.00 per barrel. Assuming this price behavior continues through market close on Friday, we expect wholesale diesel prices to increase just $0.01-$0.02 per gallon in the coming days. This is evidence of the market’s lack of concern of supply pressure stemming from the OPEC+ decision.