Opec JMMC committee mulls cuts on demand concerns

Rising global oil supplies, a weaker outlook for global oil demand growth, and a recent $15/bl decline in oil prices have combined to make a compelling argument for the Opec and non-Opec Joint Ministerial Monitoring Committee (JMMC) to recommend a return to production restraints in 2019.

The JMMC will formally meet on 11 November in Abu Dhabi to discuss various supply and demand scenarios following a meeting today of the group's Joint Technical Committee (JTC), which will present a report on the market outlook to the assembled ministers. The JMMC, co-chaired by Saudi Arabia and Russia and including member countries Algeria, Kuwait, Venezuela, Oman, is expected to conclude with a recommendation to amend production targets to avoid the risk of global over-supply, Opec delegates and technical experts tell Argus. The committee will present its final recommendation to Opec and non-Opec ministers at the full conference in Vienna on 6-7 December.

Opec and non-Opec compliance with the December-expiring 2016 agreement to remove around 1.7mn b/d from the oil market stood at 104pc in October on a preliminary basis. The figure may be subject to revision, pending the submission of production data from one of Opec's secondary sources. Argus found compliance by Opec countries participating in the November 2016 output deal eased to 122pc in October, down from 130pc in the previous month.

The possibility of further output discipline comes amid concerns over short-term demand, after Opec producers were given leeway to dial back over-compliance with their individual quotas and compensate for involuntary output declines from countries such as Iran and Venezuela.

"We are worried about the situation of the market, about the global economy, the demand, the supply," a delegate said.

The IEA, EIA and Opec all see non-Opec supply growth exceeding projections for demand growth in 2019, leading to a fall in the call for Opec crude. An average of the forecasts suggests that supply will outstrip demand by as much as 1.3mn b/d in 2019, if Opec keeps output at the Argus-estimated 13-month high of 33.02mn b/d hit in October. Last week's decision by the White House to exempt eight countries from the US commercial sanctions against Tehran for six months could also leave more Iranian supplies available, provided buyers can strike tenuous banking and shipping arrangements to secure their cargoes.

If renewed production discipline is agreed, the onus of limiting output would linger with Saudi Arabia, the UAE and Iraq – all of which have spare capacity and have raised production since June. Argus estimates that Saudi Arabia raised its crude production to 10.65mn b/d in October, just shy of its 10.72mn b/d record high in November 2016.

Iraqi production in October was just 20,000 b/d below a record-high of 4.65mn b/d in August and September, according to Argus estimates. Baghdad would be willing to participate in further Opec, non-Opec restraints, if there is consensus.

Saudi Arabia aims to agree an open-ended co-operation framework for Opec and non-Opec producers when they meet on 7 December, but Riyadh could encounter difficulties in bringing all producers on-board with a proposal for fresh output restraints. Russian production has added 450,000 b/d since May to strike a post-Soviet high of 11.4mn b/d in October.

Some delegates at the Abu Dhabi JMMC meeting say that Russia could prove difficult to persuade to lowering production, and do not exclude the possibility that Moscow might be offered a softer quota than the 300,000 b/d cut assigned in 2016. A re-negotiated deal could also see Opec countries emerge with production commitments different to the approximately 5pc cuts agreed in the 2016 deal.

It remains a possibility that Libya and Nigeria could be issued official quotas, after internal security concerns earned them exemptions from the previous agreement, and later an informal 1.8mn b/d combined production quota last November.