Opec output dipped in December ahead of deeper cuts

Opec output dipped to a three-month low in December, led by greater discipline from the group's two largest producers and involuntary Libyan declines.

Opec production fell by 170,000 b/d from November to 29.67mn b/d in December. Its output averaged 29.92mn b/d in 2019. Compliance from the 11 members bound by the production restraint agreement rose to 151pc last month, just above the average 146pc of 2019.

Saudi Arabia reduced output by 110,000 b/d in December, putting production 840,000 b/d below its agreed 10.63mn b/d baseline — covering more than the 11 producers' entire commitment.

Saudi exports were 6.6mn b/d in December. Four of the country's refineries, with a total capacity of 1.59mn b/d are scheduled for maintenance between January-April. The prospective restart of the 250,000 b/d onshore Wafra and 300,000 b/d offshore Khafji fields in the Neutral Zone is unlikely to immediately weigh on the Opec+ obligations of Saudi Arabia and neighbouring Kuwait. The two governments struck a deal to revive regional production after a five-year hiatus, but early indications suggest Neutral Zone gains will be gradual.

Output fell in Libya, where the El Feel field was shut in for six days by a valve closure. Weather-driven port shutdowns drove exports to a 10-month low.

Angola output increased for the first time since September, by 120,000 b/d month-on-month, underpinned by the end of maintenance at the 90,000 b/d Girassol field.

Opec+ members will contend will new quotas in the first quarter, when their combined cuts will deepen by 500,000 b/d to 1.7mn b/d. Saudi Arabia will slash an additional 400,000 b/d on top of that, contingent on improving compliance from some of the agreement's more chronic over-producers.

The cuts are being made in order to mitigate an outlook of excess supply in the first quarter. The IEA projected that global oil stocks could rise by 700,000 b/d over the January-March period in spite of the Opec+ efforts. Opec secretary general Mohammed Barkindo this week also highlighted a 700,000 b/d surplus in the first quarter — and 900,000 b/d of oversupply in the April-June quarter. But he was, as ever, optimistic about the success of the Opec+ initiative.

"Our permutations showed that an additional adjustment of 500,000 b/d over the 1.2mn b/d [of production cuts] will almost keep the market in check," he said. "The forecast at the moment is showing growth in demand."

He said the countries that had previously struggled with compliance are "working around the clock" to correct this. Of these, Iraq's production fell for a fourth straight month, by 60,000 b/d to 4.57mn b/d. This is still above its 4.51mn b/d ceiling, but 190,000 b/d below the record high set last August. Nigeria remains 120,000 b/d above its ceiling, which was revised to 1.774mn b/d in June from an initial 1.685mn b/d.

The short-term reliability of supplies was called into question by recent raised tension in the Middle East, with the US' killing of Iranian general Qasem Soleimani and Tehran's retaliatory airstrikes against military bases in Iraq housing US personnel causing uncertainty. Easing some concerns, the US yesterday signalled it has no plans to escalate hostilities. In Libya, military groups partially seized the city of Sirte at the start of the week, raising the stakes of a nine-month conflict. Production was unaffected.

The steeper Opec+ cuts and political developments have supported Ice Brent futures above $65/bl since 13 December. They intermittently exceeded $68/bl between 27 December and 7 January.

By Ruxandra Iordache