Concerns about a slowdown in global oil demand remained a key check on oil prices Friday, despite a decision by major oil producers to cut additional barrels next month from their production quotas.
Oil prices “found support from ongoing supply cuts by the OPEC+ group of nations,” but “weakening global economic growth kept the gains in check,” said Fawad Razaqzada, technical analyst at Forex.com.
On Friday, West Texas Intermediate crude for January delivery CLF20, +1.11% climbed by 68 cents, or 1.2%, to $59.11 a barrel, while February Brent crude BRNG20, +1.42% added 86 cents, or 1.4%, to $64.25 a barrel. Both the U.S. and global benchmarks, however, traded off their highs of the session. WTI had climbed to as high as $59.85 and Brent tapped an intraday high of $64.88.
The Organization of the Petroleum Exporting Countries and its allies, which include Russia, announced Friday that they will reduce output by an additional 500,000 barrels a day starting in January. The cuts by the group, known as OPEC+, will come on top of the agreement to curb output by 1.2 million barrels a day from October 2018 levels that went into effect in January 2019.
Including the latest cuts, the reduction total will be 1.7 million barrels from the October 2018 baseline, with the quotas set in place through March. OPEC members and OPEC+ will hold extraordinary meetings on March 5 and march 6 to decide whether to extend the cuts or reconsider production levels.
‘The sum of agreed and voluntary cut is significant and should prevent a decline in oil prices in the first quarter as demand decline[s] seasonally.’
“The sum of agreed and voluntary cut is significant and should prevent a decline in oil prices in the first quarter as demand decline[s] seasonally,” said independent energy expert Anas Alhajji, who’s also managing partner at Energy Outlook Advisors LLC. “It is confirmed now that the Saudis came to the meetings with two objectives: additional cuts and OPEC+ unity. They achieved both.”
As is sometimes the case, however, the math on the OPEC+ cuts is a bit unclear. Saudi Arabia said it would curb output by an additional 167,000 barrels a day, but it also said it would continue with its voluntary cuts of 400,000 barrels a day—reductions beyond its quota limit—to take its production target to 9.744 million barrels a day once the new reductions kick in.
In a tweet, Amena Bakr, deputy bureau chief at Energy Intelligence, said that including the voluntary cuts the Saudis are already making, the total OPEC+ reductions would equal 2.1 million barrels a day.
The OPEC press release, meanwhile, pointed out that the forecast for global economic growth in 2020 remains at 3%, and oil demand is expected to grow by 1.1 million barrels a day.
“OPEC expects relatively flat GDP growth in 2020 of only 3% globally,” but 3% global GDP growth is “what you get almost from population growth alone,” said Jason Schenker, president of Prestige Economics. “So, it’s a weak outlook. And the trade war was also mentioned as a critical macro risk.”
“As we have often stressed, the global economy has been weighing on crude oil prices, including an ongoing global manufacturing recession and the U.S business investment,” he said in a note.
Fawad Razaqzada, technical analyst at Forex.com, also noted expectations for weakening global demand growth and also pointed out that “alternative energy supply is on the rise with sales of electric vehicles, for example, booming.” Given all that, crude oil is “likely to remain subdued in 2020, although a potential resolution in U.S.-China trade spat could lift the demand outlook and provide at least a short-term boost to oil prices.”
Other important questions remain following the OPEC+ decision.
“First, will the additional cuts materialize when historic compliance within the group has been weak,” said Richard Soultanian, president of NUS Consulting Group. “Second, how much longer will Saudi Arabia be willing to shoulder the majority of the group’s productions cuts now that the Aramco issuance has been completed?”
The oil giant priced its IPO Thursday at 32 riyals per share, valuing the company at $1.7 trillion. Trading is expected on the Saudi Tadawul stock exchange next week.
“With additional production coming to market in 2020 from non-OPEC+ members, the group’s resolve and cohesiveness are going to be tested in the first half of the year,” Soultanian told MarketWatch.
All told, “measuring the success of these cuts is theoretically easy, but practically difficult: preventing inventory build in first half of 2020 is a success. Reducing inventories is a bigger success,” said Alhajji.