Opec
The Opec flag on a desk (File photo) Image Credit: Bloomberg

VIENNA: Opec and allies led by Russia on Thursday agreed one of the deepest output cuts this decade to prevent oversupply in a deal that will apply for an unexpectedly short period of the first three months of 2020.

The Organization of the Petroleum Exporting Countries (Opec) began a meeting to discuss policy in Vienna at 1630 GMT. On Friday, Opec will meet with Russia and other producers, a group known as Opec+.

Existing supply curbs of 1.2 million barrels per day, aimed at supporting oil prices and preventing a global glut, are set to expire in March.

Russian Energy Minister Alexander Novak said a panel of energy ministers including Saudi Arabia and Russia had recommended Opec+ deepen the cuts by 500,000 bpd. A cut of 1.7 million bpd would amount to 1.7 per cent of global supply.

“We really do see some risks of oversupply in the first quarter due to lower seasonal demand for refined products and for crude oil,” Novak said.

He said cuts would last through the first quarter of 2020, a shorter time frame than suggested by some Opec ministers, who have called for extending cuts until June or December 2020 amid fears of a slowing global economy.

Opec+ has agreed voluntary supply cuts since 2017 to counter booming output from the shale fields of the United States, which has become the world’s biggest producer.

Washington has forced an even steeper reduction in supply through sanctions on Opec members Iran and Venezuela aimed at choking both countries’ oil export revenue.

Producers face another year of rising output from the United States along with other non-Opec producers Brazil and Norway. “With a weaker US dollar, improving economic data and Opec aggressively managing supply, this should ensure a $60-$65 Brent oil price in the seasonally weak period of next year,” said Gary Ross, founder of Black Gold Investors.

Opec’s actions have supported oil prices at around $50-$75 per barrel over the past year. Brent crude futures on Thursday extended this week’s gains to trade above $63 per barrel.

Compromise

Non-Opec member Russia had previously opposed extending or deepening cuts as its companies are arguing that reducing output during winter months amid low temperatures damages the fields.

Saudi Arabia was more keen on reducing output as the kingdom needs higher oil prices to support its budget revenue and the initial public offering (IPO) of Saudi Aramco.

On Thursday, the state oil giant priced its IPO at the top of its price range, raising $25.6 billion and topping Alibaba’s record $25 billion listing in 2014.

Opec’s actions in the past have angered US President Donald Trump, but Trump has said little about Opec in recent months. That might change if oil and gasoline prices rise ahead of the US presidential election set for November 2020.

Opec sources said Riyadh was pressing fellow members Iraq and Nigeria to improve their compliance with quotas, which could provide an additional reduction of up to 400,000 bpd.

“Saudi Arabia is pushing for deeper cuts to try and shore up prices. However, deeper compliance is imperative and hence the deal will last only for one quarter so that they can assess compliance then,” said Amrita Sen, co-founder of Energy Aspects.