Saudis surprise market with deeper cuts

Author Argus

Excerpt from Argus Global Markets’ Opec+ Vienna Special Report: Saudi Arabia has pledged to cut output by an additional 400,000 b/d.

Opec and its non-Opec allies have agreed to increase production cuts by 500,000 b/d, with a surprise additional voluntary Saudi reduction of more than 400,000 b/d.

The Opec+ alliance agreed the new quotas at its ministerial meeting in Vienna on 6 December. "These would lead to total adjustments of 1.7mn b/d," Opec says. "In addition, several participating countries, mainly Saudi Arabia, will continue their additional voluntary contributions, leading to adjustments of more than 2.1mn b/d." This is on condition that there is "full conformity by every country" participating in the deal, Opec says. Of the 500,000 b/d of additional cuts, 372,000 b/d will come from Opec members (see table). The remaining 131,000 b/d comes from non-Opec participants, although their output will be reassessed to exclude condensates at Russia's insistence. They run from January until the deal expires in March, although ministers will have an opportunity to further extend or modify the deal when they meet in Vienna on 6 March.

"We will continue the voluntary cut of 400,000 b/d, which makes the whole total 2.1mn b/d of cuts that these 24 countries have agreed to," Saudi oil minister Prince Abdulaziz bin Salman says. But the extra cut is conditional upon the compliance of other Opec+ members with their pledged cuts, he says. "We have been consistently saying that our voluntary contribution will continue only when we see everybody committed to what they were supposed to have to do," he says. Riyadh "has no interest in fiddling with numbers without clearly speaking about actual physical barrels that will come from our actual physical production".

An Opec meeting on 5 December dragged on for nearly seven hours over the issue of ensuring that all members adhere to their agreed output quotas. Once that was addressed, the participants moved to discuss how to cut "a reasonable amount of barrels that can help to stabilise the market and handle a good chunk of what would be the expected inventory build" in the first quarter of next year.

Saudi Arabia's new ceiling will be 9.74mn b/d in the first quarter, compared with its current 10.31mn b/d quota. It produced 9.9mn b/d in November, Argus estimates. Prince Abdulaziz also says that Saudi Arabia regained its full 12mn b/d output capacity "one month" ago. Attacks on two key oil facilities on 14 September briefly forced it to shut 5.7mn b/d of crude capacity.

Opec production agreement changes

  Old quota Change New quota November output Cut needed
Saudi Arabia 10.311 -0.167 9.744* 9.90 0.16
Iraq 4.512 -0.050 4.462 4.63 0.17
Kuwait 2.724 -0.055 2.669 2.71 0.04
UAE 3.072 -0.060 3.012 3.08 0.07
Algeria 1.025 -0.012 1.013 1.03  0.02
Nigeria 1.774 -0.021 1.753 1.89 0.14
Angola 1.481 0.000 1.481 1.30 -0.18
Congo (Brazzaville) 0.315 -0.004 0.311 0.29 -0.01
Gabon 0.181 -0.002 0.179 0.20 0.02
Equatorial Guinea 0.123 -0.001 0.122 0.16 0.04
 Opec 10** 25.518 -0.372 24.746 25.19 0.44

*Includes additional 0.4mn b/d voluntary cut
**Ecuador leaves Opec in January

Condensed target

Russia has agreed to cut an additional 70,000 b/d in the first quarter, taking its overall reduction target to nearly 300,000 b/d. Condensate will no longer be part of Russia's quota. Its baseline figure from October 2018, and that of all non-Opec participants, has been adjusted accordingly.

Iraq — one of the deal's serial quota busters — has agreed to reduce its existing 4.51mn b/d quota by 50,000 b/d. Iraq produced 4.63mn b/d last month, Argus estimates. Iraqi oil minister Thamir Ghadhban says that an agreement between Iraq's federal government and the Kurdish Regional Government (KRG), under which the latter would hand over 250,000 b/d to Iraqi state-owned oil marketer Somo would facilitate better Iraqi compliance with its quota. Other notable adjustments include the UAE and Kuwait, which have agreed to trim their existing quotas by a further 60,000 b/d and 55,000 b/d, respectively.

Russian oil minister Alexander Novak and Prince Abdulaziz seem relaxed about the prospect for growth in US shale oil production, which could potentially reduce the market share of Opec+. Opec's decision to cut output will not lead to an increase in US shale oil output growth, which is slowing down, Novak says. The Opec+ group has "been doing good work" for shale oil producers as well by cutting output, Prince Abdulaziz says, adding that he hopes they will thank him.

This blog is an excerpt from the Opec+ Vienna Special Report section of the 06 December 2019 edition of Argus Global Markets, a weekly report containing vital insight into the latest international oil market developments. Click here to view the full special report as a PDF.

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