OPEC extends oil cut to prop up prices as global economy weakens

The Organisation of Petroleum Exporting Countries (OPEC) agreed on Monday to extend oil supply cuts until March 2020 as the group’s members overcame their differences in order to prop up the price of crude amid a weakening global economy and soaring US production.

The move is likely anger US President Donald Trump, who has demanded OPEC leader Saudi Arabia supply more oil and help reduce prices at the pump if Riyadh wants US military support in its stand-off with arch-rival Iran.

Benchmark Brent crude has climbed more than 25 per cent so far this year after the White House tightened sanctions on OPEC members Venezuela and Iran, slashing their oil exports.

OPEC and its allies led by Russia have been reducing oil output since 2017 to prevent prices from sliding amid soaring production from the United States, which has overtaken Russia and Saudi Arabia to become the world’s top producer.

Fears about weaker global demand as a result of a US-China trade spat have added to the challenges faced by the 14-nation grouping. “Saudi Arabia is doing its best to achieve oil prices at $70 per barrel despite what Trump wants. But they haven’t accomplished that even with Iranian and Venezuelan oil exports dropping. And the reasons for that are weak demand and US shale growth,” said Gary Ross from Black Gold Investors.

The United States, also the world’s largest oil consumer, is not a member of OPEC, nor is it participating in the supply pact. A jump in oil prices might lead to costlier petrol, a key issue for Trump as he seeks re-election next year.

Brent initially rose as much as $2 on Monday towards $67 per barrel as traders cited OPEC’s resolve to curb output. It later pared gains to trade at $65.

OPEC+ meet

The OPEC meeting on Monday will be followed by talks with Russia and other allies, a grouping known as OPEC+, on Tuesday.

Also read: OPEC, the future is probably worse than you thought

On Saturday, Russian President Vladimir Putin said that he had agreed with Saudi Arabia to extend global output cuts of 1.2 million barrels per day, or 1.2 per cent of world demand, until December 2019 or March 2020.

Continuation of policy

Oil prices could stall as a slowing global economy squeezes demand and US oil floods the market, a Reuters poll of analysts found.

Saudi Energy Minister Khalid al-Falih said he was growing more positive about the global economy after a G20 meeting of world leaders over the weekend. “The global economy in the second half of the year looks a lot better today than it did a week ago because of the agreement reached between President Trump and President Xi of China and the truce they have reached in their trade and the resumption of serious trade negotiations,” Falih said.

He said Saudi Arabia would continue reducing supplies to customers in July. He also said he believed US oil output would peak and then plateau, just like the North Sea or other, older oil regions.

“The reason for extending the deal by nine months instead of six is to assure the markets that the deal will remain in place through the seasonally soft demand period in the first quarter of 2020,” said Amrita Sen, co-founder of Energy Aspects.

The meeting on Monday continued for six hours as ministers discussed a charter for long-term cooperation with non-OPEC producers.

OPEC sources said Iran and Saudi Arabia were arguing about the content of a draft but finally agreed the details despite Tehran’s criticism of Putin effectively announcing the deal ahead of the OPEC meeting. OPEC also confirmed its secretary-general, Mohammad Barkindo, would serve another three-year term.

Impact of sanctions

Iran’s exports plummeted to 0.3 million barrels per day in June from as much as 2.5 million bpd in April 2018 due to Washington’s fresh sanctions. The sanctions are putting Iran under unprecedented pressure. Even in 2012, when the European Union joined US sanctions on Tehran, the country’s exports stood at around 1 million bpd.

Oil represents the lion’s share of Iran’s budget revenues.

Washington has said it wants to change what it calls a corrupt regime in Tehran. Iran has denounced the sanctions as illegal and says the White House is run by mentally retarded people. “Worsening tensions between the US and Iran add potential for oil price volatility that could be tricky for OPEC members to manage,” said Ann-Louise Hittle, vice president, macro oils, at consultancy Wood Mackenzie.

OPEC will hold its next meeting on December 5.