OPEC+ Price Spike Will be Short-Lived

The price spike on last Friday’s OPEC+ news will be short-lived due to continuing questions about the group’s ongoing compliance, increased supply in the marketplace and slowing demand from weaker global growth and sustainability initiatives.

That’s according to Richard Soultanian, the president of NUS Consulting Group, who told Rigzone that the OPEC+ agreement’s efficacy is declining with each passing month.

“With no clear exit strategy, it seems that the group’s strategy is now headline and news driven. Under these circumstances, we see prices declining in the first quarter of 2020,” Soultanian stated.

“Saudi Arabia got what it wanted out of this meeting, a strong headline and a spike in price to support the Aramco offering, however the underlying market fundamentals seem little changed,” he added.

Following the OPEC+ meeting last week, Muktadir Ur Rahman, the director of Apex Consulting Ltd, told Rigzone that the supply-demand fundamentals for 2020 “don’t look particularly promising from a higher oil price perspective”.

“All things considered, in 2020 we expect [Brent] prices to continue to remain range-bound like this year, between high $50s and mid-to-high $60s,” Rahman stated.

“Prices could go even lower if global growth turns out to be lower than what the market is currently anticipating, particularly if the U.S.-China trade war escalates further,” Rahman added.

The Apex Consulting Director went on to say that prices can also go up, if global economic growth turns out to be stronger than what is expected currently, “especially if the U.S.-China trade war situation improves”.

“In such a case, depending on the overall demand-supply balance, Saudi Arabia, as OPEC’s de facto leader, may allow members to unofficially produce more than their agreed quotas and even increase its own production too,” Rahman stated. 

Persistent Overcompliance Will Support Prices

After the OPEC+ meeting ended, Abhishek Kumar, head of analytics at Interfax Energy in London, told Rigzone that Interfax Global Gas Analytics forecasts the Brent crude front-month futures price will average $64 per barrel in 2019 and $69 per barrel in 2020.

Kumar said OPEC+’s decision to deepen the output cut in itself will not be a “significant” bullish factor for oil prices but added that “persistent overcompliance” with the production-cut target will be supportive of prices.

“The outcome of the OPEC+ meeting signifies a compromise between Saudi Arabia and Russia,” Kumar stated.

“The decision could also be seen as member countries giving Saudi Arabia some time to go through the process of Aramco’s IPO. High enough and stable oil prices will facilitate the IPO process,” he added.

Kumar warned, however, that several OPEC+ countries will be “mindful of the practical problems posed by the cartel’s current stance”.

“Deepening or extending cuts is no solution to the issue of oversupply from nations such as the United States, which are not part of the agreement,” Kumar said.

“Furthermore, this problem is set to exacerbate in 2020, which also implies that the OPEC+ group will further lose its share of the oil market,” he added.

“Consequently, this will remain a core issue during the subsequent OPEC+ meetings, which could also threaten the cartel’s unity,” Kumar continued.

Commenting on the latest OPEC+ deal, Ann-Louise Hittle, vice president of macro oils at Wood Mackenzie, said the fact that the agreement runs to March could reduce its “supportive impact” on the market.

“However, the proactive, short-term management of the market OPEC+ is signaling is supportive overall to the outlook for 2020 and should avoid a significant downturn in prices,” Hittle added.

Latest OPEC+ Deal

The seventh OPEC and non-OPEC Ministerial Meeting held last Friday decided for an additional adjustment of 500,000 barrels per day, leading to total adjustments of 1.7 million barrels per day.

In addition, several participating countries, mainly Saudi Arabia, will continue their additional voluntary contributions, leading to adjustments of more than 2.1 million barrels per day, OPEC’s website states.

“This additional adjustment would be effective as of January 1, 2020 and is subject to full conformity by every country participating in the Declaration of Cooperation,” a statement posted on OPEC’s website reads.

OPEC’s next meeting will be held on March 5, with the next OPEC and non-OPEC Ministerial meeting held on March 6. A further OPEC meeting is scheduled for June 9 and an additional OPEC+ meeting is due to take place on June 10.

For highlights of the latest OPEC+ ministerial meetings, see below:

🎥Watch highlights of the just concluded Ministerial Meetings in Vienna 👇 pic.twitter.com/DhlS2xH6O6

— OPEC (@OPECSecretariat) December 9, 2019

To contact the author, email andreas.exarheas@rigzone.com