Opec supply reductions to support oil prices

Abu Dhabi: Supply reductions by the Opec+ group are expected to support oil prices over the short term, but there are concerns about how the trade war between China and the US could impact global demand, according to analysts.

Opec (Organisation of the Petroleum Exporting Countries) and non-Opec members led by Russia, which combined form Opec+, are cutting production by 1.2 million barrels per day to rebalance oil markets and prop up oil prices. The output cut agreement was reached between major oil producing countries in Vienna last month.

“Crude oil is beginning to show signs of support following more than 40 per cent collapse since last October. Since hitting the key technical and psychological $50 per barrel, it has managed to recover strongly due to an improved outlook for both supply and potentially also demand,” said Ole Hansen, head of commodity strategy at Saxo Bank.

Brent, the global benchmark, was up by 2 per cent at $57.06 per barrel when markets closed on Friday. West Texas Intermediate was up by 1.85 per cent at $47.96 per barrel.

Hansen said Opec responded strongly to the worsening outlook by slashing December crude oil production by the most since January 2017.

Monthly production surveys from Bloomberg and Reuters both showed that Opec had cut production by around 500,000 barrels to 32.6 million barrels per day, he said.

The slump was led by a voluntary reduction from Saudi Arabia (420,000 barrels per day) and unplanned reductions from Iran (120,000 barrels per day) and Libya (110,000 barrels per day).

“While supply reductions may begin to provide some support, the demand outlook needs to stabilise as well.”

“They (Opec and other producers) also must worry about the global outlook for growth and demand, something over which they have no control. The fact that China (the world’s biggest importer of oil) and the US (the biggest consumer) are fighting a trade war is a matter of concern.”

On the other hand, analysts expect better compliance to the output cut accord from Opec and non-Opec members due to the recent drop in oil prices.

“The recent drop in oil price has been a shocking wake-up call for Opec, non-Opec, that with low compliance the future is very grim,” said Fereidun Fesharaki, Chairman of FGE consultancy in a note.

“We must remember the best cure for low prices is lower prices! Everyone knows that Opec functions best under pressure and the Opec, non-Opec accord is stronger after the recent collapse in prices.”

He predicts Brent to trade in the range of $65 to $70 per barrel in the second half of 2019.