Some question marks after OPEC's decision

Summary:

• OPEC+ decides to extend its oil production cuts

• A lot of question marks regarding specific crude output limits

• Technical and fundamental outlook supports higher prices

Oil prices have been remarkably volatile so far this year. We saw gradually rising prices since the end of 2016 and sharp rises experienced in August/September convinced many market experts to expect further rises even toward $100 per barrel. However, it turned out that they overreacted and prices collapsed. Let us remind that the OPEC decided to increase its production in middle of this year on the back of unplanned output cuts in Venezuela, Nigeria, Libya and Iran. As a consequence, Saudi Arabia and Russia began pumping much more oil than previously agreed basically leading to an end of the broad production cut agreement. Simultaneously, US sanctions on Iran turned out to be less harmful than thought. What all of that means in the light of the December’s OPEC meeting?

Bumpy road to agreement

A majority of OPEC countries bumped up their production levels significantly in several past months with Saudi Arabia being at the forefront. Source: Bloomberg

The last Thursday ended with a debacle in terms of negotiations regarding production cuts. However, OPEC and non-OPEC countries were able to reach an agreement on Friday despite some sticking points concerning Iraq, Saudi Arabia and Russia. Ultimately, the cartel agreed to cut production by 1.2 mbpd (0.8 mbpd - OPEC, 0.4 mbpd - non-OPEC). Exemptions from the cuts were among prime issues in negotiations. Finally, Libya, Iran and Venezuela secured production cut exemptions. The cuts will be made through six months beginning from January 2019 and October will be the reference point. It means that the starting point is very high (record output of Russia oil). The details showed that Russia is expected to cut out output by 100-200 kbpd.

Saudi Arabia and Russia have increased their output substantially in recent months. Source: Bloomberg

In theory, the ultimate cut is to total 1.2 mbpd, almost the same what the consensus had pointed. Nevertheless, it is worth mentioning that oil producers (except Russia) often deviated from their agreed output limits. For example, in October Kazakhstan produced 200 kbpd more oil that it had been allowed, hence its starting point will be artificially high. Therefore, for Kazakhstan it could be almost impossible to meet it commitment.

Kazakhstan pumped more than 200 kbpd oil than previously agreed. Source: Bloomberg

Time to bounce

Technically and fundamentally there is a chance to see a bounce in oil prices in the nearest future.

Oil stocks are rising but with the OPEC agreement they should move lower. Source: Bloomberg, XTB

Oil prices are historically low comparing to the prior years’ levels. Source: Bloomberg, XTB

To sum up, market participants expected more from the OPEC. We also claimed that OPEC’s determination should have been higher than usual. However, OPEC countries are paying attention to their own interests in particular neglecting interests of the entire cartel. Either way, the decision to extend the current production cuts beyond this year highlights OPEC’s determination to see higher crude prices. We see a chance to see a larger rebound if external risks such as trade tensions subside.

Oil prices are rebounding after the OPEC’s decision increasing odds to see a more long-lived bounce. Source: xStation5