Will OPEC cut Oil Production in 2019?

11 December 2018

Lab Chat

The UAE governor of OPEC interests Ahmed al-Kaabi has given the clearest indication yet that the 14-nation bloc plans to cut oil production in the coming year. Speaking to Emirati newspaper Al Bayan, al-Kaabi said that OPEC wishes to stabilise the price of the popular commodity, which has been in freefall since early October, and plans to do so by reducing its output.

OPEC had previously upped its production quota to compensate for decreases in countries like Iran and Venezuela, both of which are facing sanctions from the international community. However, it now looks likely that 2019 will see a renewed drop-off in production, though al-Kaabi said that the bloc had not yet decided by how much it would pull back its operations.

Controlling prices

Since the market crash in 2014, OPEC has been steadily reducing its output of oil to try and bring prices back up to a respectable level. After compliance rates reached 163% and prices reached almost $90 per barrel a couple of months ago, it looked very much like it was mission accomplished for the bloc. This year, however, they have begun slowly increasing production rates to compensate for projected drop-offs elsewhere.

Venezuela has long been the subject of international sanctions thanks to the damaging policies of its government and the precarious state of its economy. Meanwhile, President Trump’s decision to withdraw from the Iranian nuclear deal and impose fresh sanctions on the country led other OPEC nations to ramp up their productions to compensate, while ongoing civil wars in Yemen and Syria continue to endanger their own output.

However, Trump recently issued waivers to eight countries regarding the Iranian sanctions, including two of the biggest importers and consumers in China and India, meaning that the projected shortfalls in supply have not materialised. This has caused the commodity to endure its worst ever streak of losses, depreciating in value for 12 sessions in a row. As a result, OPEC are now considering drawing back once more.

Difference of opinion

According to al-Kaabi, OPEC members are in agreement about their strategy for next year and production cuts look almost certain to happen. However, non-OPEC members look less eager to commit to such a plan of action and there may be a difference of opinion when the two factions come together at next month’s meeting of the Joint Ministerial Managing Committee (JMMC).

The de facto leader of non-OPEC countries, Russia, was far less enthusiastic about taking drastic measures and plans to exercise caution with regards to its oil output. “As for the need to limit production or not, I will not say anything about this for the time being,” said President Vladimir Putin. “We must be very careful in this respect because every word is important and affects the federal budget revenues. However, it is obvious that we should cooperate and we will cooperate.”

“About $70 per barrel suits us perfectly well considering that the expenditure side of our budget is based on $40 per barrel,” Putin went on. It is also likely that Putin does not want to commit to stringent production cuts as this would potentially endanger Russia’s relationship with the volatile Trump, who has repeatedly demanded OPEC not drop its output on Twitter.

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