The OPEC meeting in December every year is an important meeting that connects the past and the future, and is also an important event in the international crude oil market. This year OPEC is still in an atmosphere of production cuts, so this meeting is particularly eye-catching. The 177th OPEC and 7th OPEC+ meetings held on December 5-6 ultimately did not extend the production cut period as expected by the market, but decided to intensify production cuts. OPEC and non-OPEC decided to increase production cuts by 500,000 barrels per day in the first quarter of 2020 to 1.7 million barrels per day, of which OPEC will bear approximately 370,000 barrels per day. After the results were announced, oil prices did not jump significantly, and Brent futures fell short of the 2.7% increase after last year’s meeting.
Generally speaking, increasing production cuts is a more effective means than extending the production cut period, and the support for oil prices should also be stronger. Why has it achieved little effect this year?
First of all, the production reduction policy implemented by OPEC in 2019 was in 2018 Formulated in the fourth quarter, the agreement stipulates that OPEC will reduce production by 800,000 barrels per day and non-OPEC will reduce production by 400,000 barrels per day. OPEC will use the production level in October 2018 as the benchmark. At the same time, taking into account factors such as domestic and international situations, immunity was granted to Iran, Venezuela and Libya. Therefore, it can be seen that compared with the benchmark in October last year, OPEC’s production level in October this year was reduced by approximately 1.08 million barrels per day. There is actually only a gap of 90,000 barrels/day from the latest target of 1.17 million barrels/day at the December meeting this year. From January to November this year, OPEC has been exceeding the implementation of production reductions, with an average production reduction rate of around 130%, and the production reduction rate in November was as high as 150%. The new production reduction target essentially puts no pressure on OPEC. It seems that the intensity of production reduction has been increased, but in fact it does not require a lot of effort. For non-OPEC, the new production reduction target has been increased by 130,000 barrels per day, and the overall non-OPEC production reduction implementation rate in 2019 is about 95%. The enthusiasm is not as good as OPEC, but the performance is acceptable. At the December meeting, Russia, as a non-OPEC representative country, ultimately failed to reach an agreement with OPEC on whether condensate should be included in the scope of production cuts. Russia has always had a vague position on the intensity and duration of production cuts. It may even reduce the production of traditional crude oil and increase the production of condensate next year. Therefore, OPEC will still be the main force in reducing production next year. Of OPEC’s new production reduction target of 370,000 barrels per day, Saudi Arabia will bear about 160,000 barrels per day. Interestingly, Saudi Arabia stated that if both OPEC and non-OPEC countries can achieve 100% of the established production reduction targets, Saudi Arabia is willing to reduce production by an additional 400,000 barrels per day. However, the range of 400,000 barrels per day is a floating plan. To put it bluntly, everyone is doing their best, and Saudi Arabia is willing to give up more market share. But if everyone is based on their own calculations, I will not fill the gap. obligations. Therefore, if both OPEC and non-OPEC can fully implement the plan next year, the overall production reduction target will be increased to 2.1 million barrels per day. At present, neither OPEC member Iraq nor non-OPEC member Russia are very willing to reduce production, so it remains to be seen whether Saudi Arabia can achieve this additional amount. In any case, judging from the December meeting, OPEC still tends to release positive signals to boost the market, indicating that OPEC does not have enough confidence to end the production reduction policy under the current environment. It is expected that OPEC will continue to extend the production reduction period in March next year, and may even extend it to the end of the year. The production reduction atmosphere will still be important to the international crude oil market next year, and will also be a critical bottom support for international oil prices. </p
