OPEC+ meeting: Are deeper production cuts on the cards? – Special Report

Raffi Boyadjian, XM Investment Research Desk

OPEC, Russia and other major oil producers will meet in Vienna on December 5-6 to decide what production quotas to set as the current arrangement to cap output is set to expire in March 2020. The club’s largest producer, Saudi Arabia, is pushing for deeper cuts. However, its key strategic partner – Russia – is unlikely to agree to anything more than an extension of existing limits. But as oil prices aim to finish the year more than 20% higher, would an extension be enough to sustain the gains?

Oil prices are off earlier 2019 peaks

After a strong rally in the first four months of the year that took both WTI and Brent crude prices to six-month highs, the commodity has been drifting lower ever since in a consolidation pattern. The unstoppable rise in US crude oil production has been hampering the alliance’s efforts to lift prices, which had slumped by about 45% in the fourth quarter of 2018 before major producers stepped in to curb output and stem the decline. The dimming outlook for crude oil demand against the backdrop of a never-ending trade war, which has triggered a global economic slowdown, has been a further headache for producers.

Saudi Arabia wants steeper cuts

But with many counties, including Russia, resisting tighter production curbs and failing to fully comply with the assigned targets, a rollover of the existing agreement may be the best Saudi Arabia can hope for. The latest meeting couldn’t have come at a better time for Saudi Arabia who wants to boost oil prices ahead of the initial public offering (IPO) of the state-owned oil giant Saudi Aramco. The final pricing of the IPO is due to be determined on December 5, the same day as OPEC meets to discuss the output cuts (non-OPEC countries will join the discussions on December 6).

However, even if talk of deeper cuts succeeded in provided a bit of a boost to prices this week, the gains were nowhere near enough to offset the losses from last week when they plunged on monthly data showing US oil output hit a new record of 12.47 million barrels a day in September. Soaring US output continues to cast a shadow over OPEC and other producers as it comes at a time when the outlook for demand is weakening amid the push for renewable energy and sluggish economies around the world.

Gloomy outlook for oil demand

The International Energy Agency maintained its 2020 forecast for growth in demand at 1.2 million barrels per day (bpd) in its latest monthly report but warned of further risks to the outlook from the Sino-US trade war. Tougher carbon emissions rules globally are also weighing on the demand outlook as fears about climate change have sparked a rush for emissions-free vehicles and electricity.

But although Saudi Arabia is not the only member of the organization that would like to see higher oil prices, the will for tighter restrictions doesn’t appear to be there, with many countries, including Russia, worried about losing market share to the United States if they were to make heftier cuts to production. Russia is even pushing for a change in the way its quota is calculated, arguing that its production of condensate oil should not be included in its quota.

An extension unlikely to boost prices

All this points to OPEC and non-OPEC countries agreeing to simply extend the existing output caps to the middle of next year. There’s a reasonable chance member states could agree to a longer extension – until the end of 2020 – as well as a stronger commitment by participating nations to comply fully with the production targets, which would send out a positive message about their determination to keep prices stable.

A longer extension would be mildly positive for oil prices, potentially helping WTI oil to recoup last week’s slide. An upward drive is likely to meet resistance at the 38.2% Fibonacci retracement of the December 2018-April 2019 uptrend at $57.34 a barrel. Crossing above this level, which also coincides with the 200-day moving average (MA), would bring the $58.75 resistance area back into scope. However, a break above this key level could be difficult without OPEC+ agreeing to steeper production cuts. In the bigger picture, WTI oil would need to surpass the April peak of $66.60 in order to crack outside of its current sideways range and turn decisively bullish.

But if oil producers decide only to keep the current quotas in place until June 2020, WTI oil may just manage to hold above its 50-day MA and maintain a neutral bias. Slipping below the 50-day MA in the $55.50 region could see prices accelerating their declines towards the 61.8% Fibonacci at $51.62 – the bottom of the recent sideways range.

Trade war could determine prices in 2020

Moving into 2020, the outlook for oil will very much depend on how the trade war story plays out as a prolonged dispute will not do the commodity any favours. Rising output from outside of the OPEC+ countries will be another factor in determining whether the oil market enters another supply glut in 2020. The question is, should OPEC+ producers be faced with weaker demand and rising supply, will they be able to step up to the challenge and agree to more drastic cuts?