When oil cartel OPEC announced its 1.2 million barrels per day (bpd) output cut alongside 10 Russian-led non-OPEC producers, after keeping the market on edge for most of December 6 and 7th, many thought the move would provide a modicum of support to rapidly declining oil prices.
While I never bought the relief rally that followed in its wake, many did. The argument was that a 1.2 million bpd cut was well above the rumored level of 1 million bpd.
Given that the production of Nigeria and Libya fluctuates because of their internal strife, that of Venezuela is rapidly declining courtesy its political mess, and Iran – exempted from the latest cut – was likely to face barriers in 2019 following the re-imposition American sanctions; 1.2 million bpd was actually as high as 1.5 million bpd in all but name, according to some market commentators.
Whether or not you buy that hypothesis, even 1.5 million bpd is not enough and that is why the so-called relief rally failed to last even a week following the OPEC meeting. In the run up the end of the year (see chart below), on the Friday (December 21) before Christmas, both Brent and the West Texas Intermediate front-month contracts fell by over 11% week-over-week.
With the U.S. - already the world's largest oil producer - providing adequate buffer production to neuter the OPEC swing in the face of lackluster demand, the market remains unconvinced. Of course, not all oil barrels extracted are equal, and U.S. barrels in the export market are largely of a lighter, sweeter variety by composition.
But the fact that incremental American production would on its own cancel out OPEC and non-OPEC cuts in 2019 is a point not lost on traders. Smart money suggests it is a point OPEC is just as cognizant of. For the OPEC and non-OPEC cuts to carry weight, the cut should have been around 2 million bpd in my opinion; a level both parties knew they need if providing an oil price floor of $60 per barrel using Brent as a benchmark is their unstated objective.
Problem is, had they chosen that pathway, the most visible beneficiaries would have been U.S. shale players, and OPEC just didn't want to blink. But having seen the end-result in the three weeks since the OPEC meeting, new jitters have surfaced.
The next OPEC meeting has been set for an unspecified date in April, in the knowledge that further intervention might be required. Now talk is rife of a possible "extraordinary", unscheduled meeting of oil ministers before April.
To provide some context, the last extraordinary meeting was held in 2008 when the global financial crisis appeared on the horizon. If the cuts are expanded, OPEC's desired price range of $60-70 per barrel might well be achieved, but that would encourage higher production stateside and a loss of market share for some in OPEC. It could all have been so different, and ongoing bearish sentiment is to an extent of OPEC's own making.
Having announced cuts, the following week the Russians revealed they'd be pretty slow in implementing cuts and might not get to their agreed 200,000 bpd level before the end of Q1 2019, while the United Arab Emirates announced a massive investment aimed at boosting oil production. That is hardly an 'on-message' image that OPEC and 10 non-OPEC producers – signatory to output cuts – ought to be portraying.
Meanwhile, U.S. crude continues to alter the supply-side dynamic. For the next 5 to 7 years, contingent upon shale decline rates, the U.S. will remain a solid buffer producer first hitting 12 million bpd, and subsequently 15 million bpd by 2025 according to industry projections, and all in tandem with an evolving oil demand dynamic that would shift from mobility to rely upon petrochemicals and aviation.
Apart from issues with its own credibility, the potent problem OPEC is grappling with is that it is damned if it cuts output, and damned if it doesn't, with either move bringing a different kind of crude pain; and all of it for the sake of trying to keep oil prices within a very modest $60-70 range.
