OPEC likely to extend cuts as oil demand sinks

The powerful Saudi-dominated oil cartel faces US shale production fuelling low prices.

    Is the sun setting on oil demand? [Ali Mohammadi/Bloomberg]
    Is the sun setting on oil demand? [Ali Mohammadi/Bloomberg]

    The OPEC+ alliance is poised to 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.

    Oil rose the most in a week after Iran became the latest OPEC member to back an extension of as long as nine months. The leaders of Russia and Saudi Arabia, the dominant members in the alliance, settled on the idea of extending the cuts into next year during the G-20 meeting in Japan.

    Asked whether he supported the plan as he arrived for OPEC's meeting on Monday, Iranian Oil Minister Bijan Namdar Zanganeh said, "I don't have any issue."

    Originally envisioned as a short-term fix in 2017 to drain excess global stockpiles, the decision to keep rolling the cuts forwards shows the challenge of controlling the oil market in the age of shale. While the strategy has succeeded in raising prices, OPEC's share of the global oil market has fallen to the lowest since 1991.

    Oil ministers from the Organization of Petroleum Exporting Countries and its allies will hold a series of meetings Monday and Tuesday in Vienna to fix production policy. Saudi Arabia and Russia are usually able to steer the alliance toward their preferred strategy.

    By pushing to extend the cuts until March 2020, Saudi Arabia is trying to avoid cliffhanger meetings, when the group gathers only days - or even hours - before a round of curbs expire, according to an OPEC 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.

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    The oil market responded positively to the prospect of an extension, as well as the truce in the China-U.S. trade war. Benchmark Brent crude oil futures rose as much as 3.1% to $66.75 in London trading.

    The International Energy Agency and other market watchers have pegged back forecasts for demand growth in recent months as China and India, the twin engines of global energy consumption, didn't grow as fast as originally expected. 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 market is going to like the nine months extension," said Mohammad Darwazah, oil analyst at consultant Medley Global Advisers, who's in Vienna monitoring the oil talks. "Everyone now is realizing that in 2020 supply growth will exceed demand growth. And the Saudis and the Russians are trying to get ahead of that situation."

    Nigeria, Venezuela, Iraq and Oman also expressed their conditional support for an extension of as long as nine months, which isn't the OPEC policy playbook as the oil-club has traditionally aimed for half-year deals.

    Despite the broad consensus for a six-to-nine month extension, the meeting could prove contentious as Iran appears determined to make an issue of the growing dominance of Saudi Arabia and non-member Russia in the policy decision making of the cartel. Zanganeh said he may reject several side agreements meant to solidify the long-term collaboration between OPEC and Russia and other oil producers.

    Until the weekend, OPEC officials had been discussing prolonging cuts through 2019. Yet Russian President Vladimir Putin opened the door to 2020 by mooting longer curbs after meeting with Saudi Crown Prince Mohammed Bin Salman.

    Hours after Putin's meeting in Osaka with Prince Mohammed, Saudi Oil Minister Khalid Al-Falih said that Saudi Arabia supported a nine-month extension but that "we have to talk to other ministers." He warned that oil-demand growth had "softened a little bit," but said there wasn't a need to deepen the cuts.

    The group is likely to schedule its next meeting for December, according to Secretary-General Mohammad Barkindo, who also said he expects his term as secretary-general to be renewed beyond its expiry in August.

    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. OPEC's total crude output over the month dropped by 130,000 barrels from May to 30 million barrels a day.

    "I'm for an extension, I think it's needed for the current conditions of the market," Suhail Al Mazrouei, energy minister for Saudi Arabia's regional ally the United Arab Emirates, told reporters in Vienna. "So I'm expecting a rather easier meeting."

    SOURCE: Bloomberg