Oil Jumps as OPEC+ Signals Cut Extension
OPEC will extend production cuts into 2020 as the world’s leading oil exporters fret about a weakening outlook for global demand growth and the relentless rise in output from America’s shale fields.
Ministers meeting in Vienna agreed to prolong supply curbs by a further nine months, delegates said, asking not to be named because the talks were ongoing. The decision still needs to be ratified by non-OPEC allies on Tuesday, but several of those nations, most notably Russia, have already given their approval.
Originally envisioned as a short-term fix in 2017 to drain excess global stockpiles, the repeated decisions to keep rolling the cuts forward shows the challenge of controlling the oil market in the age of shale. While the strategy has succeeded in raising prices, the Organization of Petroleum Exporting Countries’ share of the global oil market has fallen to the lowest since 1991.
Oil in London traded up 1.4 per cent at $65.62 a barrel as of 4:14 p.m. local time, paring earlier gains following widespread expectation of continued cuts.
"Before the meeting, everybody was expecting a rollover of the current agreement, and that’s what we have," said Olivier Jakob, managing director of Petromatrix GmbH. "We’re pretty much in a stalemate situation with the continued rise of U.S. production."
By pushing through an extension until March 2020, Saudi Arabia is seeking to avoid cliffhanger meetings, when the group gathers only days -- or even hours -- before a round of curbs expire, according to a delegate briefed on the strategy. OPEC will meet before the end of the year, perhaps in December, giving the cartel a cushion of several months between its next meeting and the end of the agreement.
For Moscow, there’s an extra incentive to extend the curbs by nine months as Russian oil companies struggle to raise production over the winter. By extending the deal into 2020, Russia could be in a better position to pump more during the spring of next year. The idea of a longer-than-expected extension was first mooted by President Vladimir Putin after he met Saudi Arabia’s crown prince at the G20 summit in Japan on Saturday.
OPEC ministers meeting at the organization’s secretariat also agreed to a second term for Secretary-General Mohammad Barkindo, whose three-year tenure comes up for renewal in August. They failed to agree on a charter for a long-term alliance with non-OPEC partners, postponing its ratification, delegates said.
Since OPEC joined forces in 2016 with other producers including Russia, Kazakhstan and Mexico, they have sought to establish an enduring basis for cooperation. But Iran has voiced unhappiness with the dominance that non-member Russia -- not to mention regional rival Saudi Arabia -- exert over OPEC policy.
The decision to extend production curbs through next March comes as the International Energy Agency and other market watchers peg back forecasts for demand amid sluggish growth in China and India. At the same time, American shale production has set fresh records, putting the U.S. on the brink of becoming a net oil exporter.
"The oil market is getting excited about the cut extension, but OPEC appears more and more worried about demand," said Andrew Dodson, founder of commodity hedge fund Philipp Oil.
The current version of the OPEC+ deal calls for production curbs of 1.2 million barrels a day, though the alliance has cut more than it pledged as U.S. sanctions on Iran and Venezuela slashed output from both countries.
Saudi Arabia has also unilaterally made deeper curbs, pumping 9.73 million barrels a day in June, according to a Bloomberg survey of officials, analysts and ship-tracking data. That compares with its OPEC+ ceiling of 10.3 million.
Saudi Oil Minister Khalid Al-Falih said Monday that the kingdom would continue to produce below 10 million barrels a day in July. Compliance among the OPEC+ group as a whole will also improve in the second half, he said.
--With assistance from Mohammed Aly Sergie, Fred Pals, Nayla Razzouk, Golnar Motevalli, Javier Blas, Dina Khrennikova, Julian Lee and Alex Longley.