OPEC+ Agrees Oil Cut Deal

Friday December 7, 2018

Following yesterday's uncertainly and indecision, OPEC and its allies today have agreed to cut oil production during the first six months of 2019.

OPEC will reduce output by 800,000 bpd, while Russia and other allied producers will contribute 400,000 bpd to the cuts to take a combined 1.2 million bpd off the market.

"I'm sure oil and gas producers in the US are breathing a sigh of relief after the decision," Saudi Arabia's Oil Minister, Khalid Al-Falih, was quoted by Bloomberg as saying, suggesting there was an upside for the US from the deal despite President Trump having urged the OPEC+ nations to refrain from production cuts.

The deal will not include Venezuela, Libya, or Iran - with the latter already subject to oil-related sanctions from the US.

Nigeria, exempt under the previous deal, is now included.

The news sent oil prices higher Friday, with Brent ending the day up $1.61 to $61.67/bbl having fallen from a session high of $63.73, and WTI up up $1.12 to $52.61/bbl off a session high of $54.22.

2019 is the transition year for IMO 2020 and oil prices will play a key part in shaping the winners and losers from the new rules.

To that end, Falih at least sees the deal bringing some stability to the oil markets.

"This is partly driven by our commitment to start on the right foot in 2019 and to demonstrate that delivering on this agreement is not going to take a long, protracted period of gradually winding down," he said.

But with a number of analysts suggesting the cuts might actually go too far, Wood Mackenzie were among those forecasting a tightening of markets in 3Q 2019 and Brent back above $70/bbl.

While that would typically mean HSFO bunkers at ~400/mt and MGO at ~$685/mt, the relationship between bunkers and Brent has already become disconnected from historical norms and is expected to be even more so as the January 1, 2020 start date of the new sulfur cap rule draws closer.