OPEC+ Surprises with Deeper Cuts

December 6, 2019
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OPEC and its allies finalized deeper production cuts this morning, surprising the market. Oil prices are reacting positively. WTI is bumping up against $60/Bbl for the prompt contract and Brent is near $65/Bbl.

Price has rallied to the high-end of the multi-month range

After news this morning that OPEC+ would further decrease its aggregate production, the market bid prompt-month WTI to the highest level it had maintained in the last several months.

Further, the next two years of the forward curve improved modestly.  As of this writing, the calendar-year 2020 strip was up to near $57/Bbl, gaining about half what the prompt month had.

Cal ’21 was barely higher, likely for two reasons: The market may perceive the nature of the OPEC+ deal being short-term, and second, producers are likely selling into this rally with emphasis in late 2020 and 1H2021.

 

 

New policy deal facts:

  • OPEC+’s current cut policy is for 1.2 MMBbl/d
  • Over-compliance, mostly from Saudi Arabia, has the group currently cutting at near 1.5-.1.6 MMBbl/d
  • The new policy requires a further reduction of 500 MBbl/d to 1.7 MMBbl/d
  • A cut to 1.7 MMBbl/d would only be a small 100-200 MBbl/d cut given Saudi Arabia’s over-compliance, However
  • Saudi Arabia said it would maintain a 400 MBbl/d over-compliance
  • Therefore, total supply cuts for the group would reach 2.1 MBMbl/d

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