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Opec set to extend output cuts amid global headwinds

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The Organisation of Petroleum Exporting Countries (Opec) group of oil producers and its partners are set to maintain production cuts when they meet at Opec’s headquarters in Vienna, Austria, on Thursday and Friday. Frederic J BROWN/AFP

Opec set to extend output cuts amid global headwinds

Faced with slowing global economic growth and with abundant stocks putting pressure on oil prices, the Organisation of the Petroleum Exporting Countries (Opec) group of oil producers and its partners are set to maintain production cuts when they meet in Vienna on Thursday and Friday.

The cuts of 1.2 million barrels per day from October 2018 levels were originally fixed in December last year and were already extended at Opec’s last meeting in June. They are currently due to remain in effect until March next year and could be extended “until June, the date of the next summit”, says PVM analyst Tomas Varga.

According to Andy Lipow from Lipow Oil Associates the cuts could even be drawn out “until the end of 2020”.

Opec’s Economic Commission Board – which is a strong indicator of the bloc’s direction – said last week that maintaining cuts into next year would lead to a “balanced” market.

The organisation’s members may well be tempted to follow a cautious course by a forbidding global economic context.

The trade war with the US is acting as a drag on growth in China, normally an avid consumer of oil, while the European economy is also currently stagnating.

Moreover, the output of oil producers outside Opec is breaking records – the US has been the world’s biggest producer since last year, Brazil and Canada have also increased output and others such as Norway are planning to do so.

The latest official estimates from the US show that the country’s total domestic stocks now stand at an enormous 452 million barrels.

Analysts say that taken together, these factors will leave Opec little room for manoeuvre if it wants to fulfil its stated aim of securing “fair and stable prices for petroleum producers”.

Prices have held relatively steady since the last Opec meeting, with a barrel of Brent crude hovering around the $60 mark, apart from a spike in September sparked by attacks on Saudi oil installations.

While this is a comfortable price for the likes of Russia, whose 2019 budget is predicated on a price of around $42 per barrel, it is too low for countries such as Saudi Arabia.

The Saudi government needs a higher price in order to finance its budget, despite having some of the world’s lowest production costs.

Further cuts?

The big unknown in the run-up to the meetings has been the position of Russia.

The world’s second-biggest producer, which since late 2016 has been part of the so-called Opec+ grouping, has given conflicting signals in recent weeks.

Russia has regularly been exceeding the limits foreseen under the last deal, as have Iraq and Africa’s biggest producer Nigeria.

Saudi Arabia meanwhile has stayed within the quota it had been assigned and in September urged its partners to do likewise.

Lipow says that Opec’s production cuts “are resting on Saudi Arabia’s shoulders”.

Saudi Arabia may even want “to go further with cuts” to boost the initial public offering of its national oil company Aramco, says Markets.com analyst Neil Wilson.

The offering has been delayed several times and while investors have baulked at Aramco’s valuation of around $1.7 trillion, this is still less than the Saudi authorities were hoping for.

The attacks on Saudi oil installations in September, claimed by Houthi rebels in Yemen, briefly halved the kingdom’s crude output and highlighted its vulnerability.

They also led to led to heightened tensions with Iran – a fellow Opec member – whom Saudi Arabia blamed for the attacks, a charge denied by Tehran.


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