What Happened

After the OPEC+ meeting in concluded Vienna Dec. 6, a "headline" production cut of 500,000 barrels per day (bpd) beyond current targets was announced for the first quarter of 2020, which came as a surprise to many observers compared to expectations earlier this week. The OPEC+ group, made up of OPEC and allied producers, also agreed to exempt gas condensates from the targets for the non-OPEC participants, a decision benefitting Russia. The cuts were allocated among all OPEC and non-OPEC participants. The group also announced a follow-up ministerial meeting in Vienna on March 5-6 to assess the new production goals and decide whether to modify them.

Why It Matters

Taken at face value, the headline cut would be sufficient to make a significant dent in the oil production surplus expected to build in early 2020, which would obviate concerns in the market about a potential price drop heading into the new year. However, the results and lasting market impact are likely to be much less than the headline amount implies. The removal of condensates is highly beneficial to Russia and would on its own take its current production from exceeding its current target to being in compliance with the new target. Russia will have no commitment to make any additional cuts. The Saudis took their quota down from its current level by 167,000 bpd and promised to voluntarily stay 400,000 bpd below that target if others complied. That is a real incremental cut, and is 300,000 bpd below November, but is only about 100,000 bpd below the average production levels for January-September 2019. November production was higher due to restocking after the attack on Saudi oil facilities at Abqaiq.

Implications

The incremental Saudi volume is a genuine additional cut and is quite credible. Kuwait and the United Arab Emirates also will probably comply. But with Russia effectively getting a pass, and the pledges from Nigeria and Iraq that they will comply lacking credibility, the effective cut is probably going to be in the range of around 200,000 bpd. That will leave the world oil market with rising inventories in next year's first quarter, which will probably result in a pullback from current levels once the lack of compliance by the usual laggards becomes clear. This is clearly not the sort of shock to the market that would break it out of the recent trading range and push Brent crude oil past $65 a barrel or West Texas Intermediate past $60 on a sustainable basis. It also sets up a contentious OPEC+ meeting in early March.

Also noteworthy in geopolitical terms is the complete cave-in by Saudi Arabia to Russia. By cutting deeper on its own, while redefining what is covered by the quotas in a way that circumvents any need by Russia to do more, Saudi Arabia has demonstrated that Russia has the upper hand and will continue to be dominant in what has become in some measure a duopoly. The Saudis are more fearful than Russia of lower prices, and that puts them in a much weaker bargaining position.