'"Disappointing" OPEC Cut Agreement Causes Crude to Post Strong Weekly Gains

Meanwhile, analysts disagree on the basic health of the crude market: File Image/PixaBay

Although initially received with disappointment and dismissed as ineffective, the agreement by members of the Organization of the Petroleum Exporting Countries (OPEC) to deepen their production cuts by 500,000 barrels per day (bpd) in early 2020 caused crude prices on Friday to post significant weekly gains.

Contributing to the gains was earlier  U.S. government data showing that its stockpiles had fallen for the first time in six weeks.

Brent on Friday settled 1.6 percent higher at $64.38 per barrel and rose about 3 percent on the week, while West Texas Intermediate rose 1.3 percent to $59.20 per barrel and climbed about 7 percent on the week.

Prince Abdulaziz bin Salman, energy minister for Saudi Arabia, explained to media that under the OPEC deal, his kingdom will continue a voluntary cut of 400,000 bpd and that after improved compliance from other members, the actual total cut from the cartel will be 2.1 million bpd.

Still, that represents less than 2 percent of global oil output, and pundits noted that any gains from the cut are likely to benefit American producers, who are not party to supply curbs: "North American shale supply will continue growing even in an environment with lower oil prices," Rystad Energy said in a note.

When asked to speculate what the deepened OPEC cuts will mean for the crude market, the responses demonstrated yet again the wide divergence of opinion of what state that market is actually in.

For example, Ole Hansen, head of commodity strategy, Saxo Bank, thinks the market is in oversupply; he stated that "A 500,000 bpd reduction does not alter the outlook for H1 2020 which, according to IEA data, will remain oversupplied.......see limited upside potential for prices, Brent likely to be stuck in lower $60s for foreseeable future."

Amrita Sen, co-founder, Energy Aspects, thinks the market is tight: "They [the Saudis] had to protect the downside to prices without over-tightening an already tight physical market; newly appointed Saudi Energy Minister Abdulaziz bin Salman's goal was not necessarily to push oil prices significantly higher, but rather to put a firm floor under them during Q1 2020 [fresh on the heels of the Aramco IPO] to temper any seasonal weakness."

Although many experts insist demand is in the doldrums, Phil Flynn, senior market analyst at Price Futures Group Inc., stated, "The cuts are coming at a time of year when demand will be the strongest and may also add pressure to product prices, especially ultra-low sulfur diesel, ahead of the new IMO 2020 ship fuels; while the market's response may be muted, make no mistake about it, this will give oil a floor."

In a contrary vein, Norbert Rücker, head of economics & next generation research at Julius Baer, said, "See soft demand, rising supply from the U.S., Canada, Brazil, and the North Sea.....petro-nation oil policy has so far struggled to stem against slower moving market balances and soft demand."

Frank Schallenberger, analyst at LBBW, contributed to the divergence of opinion even further by remarking, "Demand to grow by 900,000 bpd in 2020, but supply to be stronger, leading to a surplus of 800,000 bpd."

Muddying the waters yet further was Daniel Briesemann and Carsten Fritsch, analysts at Commerzbank: they stated, "We believe that yesterday's decisions [at OPEC meeting] do not go far enough...after all, the oversupply in the first quarter of 2020 is far higher than 500,000 barrels per day.

"What is more, it remains unclear how the sizeable oversupply that will likewise be seen in the second quarter can be contained without production cuts."

Meanwhile, the tone and tenor of the OPEC summit caused Herman Wang, OPEC and Middle East specialist at S&P Global Platts, to worry that "What we saw last night was not a unified OPEC; is this the beginning of the end?"

Wang cited several issues of concern, including Ecuador's decision to quit the group at the end of the year, media reports of Angola's delegate walking out of the OPEC meeting, Iraq consistently over-producing its quota, and strained relations between Saudi Arabia and Russia.

Wang concluded, "Can they hold this coalition together to keep oil prices from falling?"