No, we think not. While there is plenty of detail to get caught up in, the
only real question is whether this week's decision lowers our expectation of OPEC+ production in 2020.
The answer is no, not with any certainty (in the case of non-compliant countries) or by a meaningful
amount (in the case of Saudi Arabia).
Moreover, given the failure to comply for all of 2019,
why should we believe there will be better compliance in January 2020? This is the real problem.
The most constructive signal to come from this week is the improved appearance of OPEC responsiveness.
The now-scheduled extraordinary meeting on 5 March provides a good opportunity to forestall undesirable
weakness in oil prices, should it occur. This should reduce, but not eliminate, the possibility of Brent
prices in the USD 40's/bbl.
We believe downside remains the most likely path of oil prices in
the new year, preferring to position through options rather than futures which suffer from negative
carry. We affirm 2020 forecasts of Brent 54/bbl and WTI 50/bbl.
OPEC window dressing
The initial reports from OPEC's December meeting were of a 500 kb/d cut. Crucially this was measured
relative to the October 2018 baseline rather than current production. The reduction was therefore
(rightly) discounted by the market as merely formalising current levels of production (which were already
The last minute twist: Saudi cuts by … -60 kb/d?
During a question
and answer session, however, Saudi Arabia then pledged an additional 400 kb/d cut below what it is
officially obligated to do. This is a second attempt at delivering a 'Saudi surprise' to reset market
expectations. The informal commitment amounts to Saudi production at 9.75 mmb/d (according to our
estimate), which is not much below average Jan-Oct 2019 production of 9.81 mmb/d. Therefore the headline
cut for Saudi Arabia might be more accurately quoted at -60 kb/d. The largest cuts made to other member
quotas are also of similar amounts (50-60 kb/d) which that the signal may well be lost within the noise
of typical monthly output variability. The second largest change, of -70 kb/d in Russia, is additionally
complicated by the exclusion of condensate, a very light crude often produced in conjunction with natural
Little change to supply expectations
In the end, the only real question is
whether this changes our expectation of OPEC+ production in 2020. The answer is no, not by any meaningful
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