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Analysis: OPEC+ faces decision on oil cuts, with few good options beyond extension

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IRAQ DATA: June crude exports tumble, show progress on OPEC+ compliance

Analysis: OPEC+ faces decision on oil cuts, with few good options beyond extension

Highlights

Bloc meets Thursday, Friday to debate cuts, which expire in March

Many favor extending deal, but Russia suggests waiting

Analysts say deeper curbs needed to prevent 2020 glut

Vienna — By OPEC's own reckoning, the oil market was supposed to have turned the corner by now.

At the producer group's last meeting in July, officials said they were confident a rebound in demand in the second half of 2019 would tighten the market and boost oil prices.

Instead, OPEC and its allies are preparing to gather again in Vienna this week with Brent crude trading no higher than it was then, stymied by demand-depressing US-China tariff battles and the onslaught of US shale supplies. Forecasts for 2020 do not offer much optimism, either, with a market glut expected in the first half.

Amid that outlook, the future of the 24-country OPEC+ coalition's 1.2 million b/d output cut agreement, which runs through the end of March, will dominate the talks.

Many analysts say the group should announce deeper cuts for longer to avoid a further price slump. So far, however, OPEC delegates have largely indicated no appetite for bolder action, lest they cede even more market share to US shale and other competitors, though Iraqi oil minister Thamir al-Ghadhban told reporters in Baghdad on Sunday that a proposal to increase the cuts to 1.6 million b/d could be considered.

For the most part, OPEC+ appears headed toward a less ambitious but more straightforward extension of the deal at the same quotas.

The exact length -- three, six or nine months -- is still up for debate, as ministers try to work out the ambiguous prospects of US-China negotiations, the outcome of UN climate talks this week and next in Madrid, the market impact of the International Maritime Organization's new marine fuel regulations that go into effect in January, and the geopolitical implications of a wave of civil unrest that has swept through many OPEC members, including deadly protests in Iraq and Iran.

"An extension is logical, reasonable and most likely, in view of the uncertainties," a delegate told S&P Global Platts.

The coalition may also choose to announce nothing and kick the decision down the road, closer to the deal's end-March expiry, to gain a better view on the market -- an approach advocated by Russian energy minister Alexander Novak.

OPEC is scheduled to meet Thursday, with Russia and the nine other non-OPEC allies joining the talks on Friday. A Saudi-Russia co-chaired market monitoring committee will also convene Thursday ahead of the OPEC meeting to assess member compliance with the cuts and review 2020 scenarios.

"OPEC+ ... remains in a spot of bother and has few desirable options at the current juncture," said Ehsan Khoman, an analyst with MUFG Bank.

RELIANCE ON COMPLIANCE

As with every OPEC event, all eyes will be on its largest member, Saudi Arabia, whose delegation will be headed by Prince Abdulaziz bin Salman at his first meeting as energy minister.

Shares in state-owned Saudi Aramco are set to begin trading next week in the company's long-awaited initial public offering, and Saudi Arabia will be keen to prevent a sell-off in oil prices.

The kingdom has borne the brunt of the coalition's cuts by producing well under its quota, but Prince Abdulaziz, a longtime OPEC veteran of the Saudi delegation, has said that he will not tolerate free riders.

In the absence of deeper collective cuts, analysts say they expect the prince to lean on serial quota violators Iraq and Nigeria to improve their performance.

Bringing those two countries' production down to their agreed quotas would take some 220,000 b/d off the market based on their October output levels, and early indications are that their November production has trended in that direction. Nigerian oil minister Timipre Sylva said Sunday his country was fully compliant with its quota as of November.

But in Iraq, Prime Minister Adil Abdul Mahdi resigned Friday, following weeks of escalating demonstrations, putting its OPEC quota commitment in further doubt.

Russia, the largest non-OPEC participant's, compliance has also been patchy. Novak, however, has said he wants Russia's condensate output excluded from its quota, perhaps a sign that the country, which is less sensitive to low oil prices, will seek a looser deal.

"An extension and a signal around stronger commitment around compliance may be enough to maintain the current support of prices closer to $65/b, but it is unlikely that OPEC+ will be able or willing to push prices up significantly higher despite Saudi Arabia's aspirations," S&P Global Platts head of analytics Chris Midgley said.

MEMBERS IN TURMOIL

Impeachment proceedings against Iranian oil minister Bijan Zanganeh over a controversial gasoline price hike, protests in Algeria ahead of a presidential election later this month, a government feud in Kuwait that caused the cabinet to resign in mid-November, and renewed clashes in war-torn Libya that shuttered the El Feel oil field for a day last week will also color the Vienna talks.

Despite the upheaval, OPEC may be courting new members, with Brazilian President Jair Bolsonaro saying earlier this month he would like his country to join the organization.

Brazil would become OPEC's third largest producer and has been invited to the meeting as an observer, along with South Africa and Senegal, according to sources.

The organization may also say goodbye to Ecuador, which announced in October it was quitting OPEC at the end of the year, though sources say the country may be reconsidering. Its oil minister Jose Agusto has not decided whether to attend the meeting, the sources said. If Ecuador leaves, it would follow Qatar's exit at the end of 2018 and bring OPEC's roster down to 13.

--Herman Wang, herman.wang@spglobal.com

--Edited by Jonathan Dart, newsdesk@spglobal.com

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