OPEC’s oil cut 2019 in view as markets brace for surplus

OPEC has signalled it is considering a return to oil output cut next year, which is potentially the second production reversal this year.

Rising oil prices, unprecedented political pressure from President Donald Trump, Saudi Arabia, Russia and other producers had opened the taps. But with U.S. midterm elections over and crude futures wilting in the face of another historic shale oil surge, the Organisation of Petroleum Exporting Countries (OPEC) will discuss a change of course this weekend.

“The message from OPEC looks like: fasten the seat belts,” Bob McNally, president of Rapidan Energy Advisors LLC, a consultant in Washington told Bloomberg. The cartel looks sets to “put pedal to the metal to boost production, and then immediately slam the brakes pretty hard and talk about cutting supply.”

Ministers from OPEC and its allies will meet in Abu Dhabi on Sunday and discuss scenarios including the possibility of cutting production again next year, according to delegates. Some members are concerned that inventories are rising, they said, asking not to be named because the discussions are private.

If the group, led by Saudi Arabia, does ultimately decide fresh cutbacks are necessary, there are a number of challenges. It will need to once again secure the support of rival-turned-partner Russia, which has less need for high oil prices. There’s also the risk of antagonising Trump, who repeatedly accused the group on Twitter of inflating prices.

November 30, 2017, OPEC and non-OPEC producers led by Russia agreed to extend oil output cuts until the end of 2018 as they try to finish clearing a global glut of crude while signalling a possible early exit from the deal if the market overheats.

But in June, the cartel agreed to increase output by 1 million barrels a day, in a bid to prevent sharp rallies in crude prices that could potentially curb consumer demand. That came after President Trump urged the group to act in order to prevent further increases, even amid looming American sanctions on Iran, OPEC’s third-largest producer.

However, this trend is set to be reversed as an already stormy oil market verges on surplus supply. This is because, U.S. oil production jumped to a record 11.6 million barrels a day last week, and rising U.S. output is a factor that could prompt OPEC members and allies to react when they meet over the weekend.

Oil prices have cratered amid concerns of a global supply glut, and the jump in U.S. output to a point where it is now surpassing Russia, in addition to Saudi Arabia, only adds to these concerns. West Texas Intermediate futures are now down 20 percent from the near four-year high reached on Oct. 3.

U.S. production is up a stunning 2 million barrels a day from the same period last year, and 400,000 barrels from the week earlier, based on weekly U.S. government data.

Crude prices already reflect a much weaker outlook for 2019. Brent for January delivery has retreated about 15 percent from a four-year high reached in early October. Prices jumped 1.3 percent to $73.02 at 1:38 p.m. in London on Wednesday.

“They will absolutely want to at some point next year try to arrange a reduction in production,” Ed Morse, head of commodities at Citigroup Inc. “Everything points to a fairly weak balance: the world economy is decelerating, the China trade tensions are having a visible impact on demand.”

The meeting this weekend of the Joint Ministerial Monitoring Committee, a six-nation body representing the broader 25-country coalition, is intended as just an interim review before all ministers discuss policy next month in Vienna. Still, it could give a strong signal of what is to come.

STEPHEN ONYEKWELU