OPEC agrees to extend oil output cuts into 2020

Delegates say ministers in meeting in Vienna have agreed to prolong their supply curbs by another nine months
OPEC agrees to extend oil output cuts into 2020
By Bloomberg
Mon 01 Jul 2019 06:45 PM

OPEC will extend production cuts into 2020 as the world’s leading oil exporters fret about a weakening outlook for global demand growth and the relentless rise in output from America’s shale fields.

Ministers from the group meeting in Vienna agreed to prolong their supply curbs by another nine months, said delegates, asking not to be named because the talks were ongoing. The decision still needs to be ratified by non-OPEC allies on Wednesday, but several of those nations, most notably Russia, have already given their approval.

Originally envisioned as a short-term fix in 2017 to drain excess global stockpiles, the repeated decisions to keep rolling the cuts forwards shows the challenge of controlling the oil market in the age of shale.

While the strategy has succeeded in raising prices, the Organization of Petroleum Exporting Countries’ share of the global oil market has fallen to the lowest since 1991.

Oil prices responded positively to the idea of a longer extension.

“The market is going to like the nine months extension,” Mohammad Darwazah, oil analyst at consultant Medley Global Advisers, said in Vienna before the agreement. “Everyone now is realizing that in 2020 supply growth will exceed demand growth. And the Saudis and the Russians are trying to get ahead of that situation.”

By pushing to extend the cuts until March 2020, Saudi Arabia is trying to avoid cliffhanger meetings, when the group gathers only days -- or even hours -- before a round of curbs expire, according to an OPEC delegate briefed on the strategy.

OPEC will meet before the end of the year, perhaps in December, giving the cartel a cushion of several months between its next meeting and the end of the agreement.

For Moscow, there’s an extra incentive to extend the curbs by nine months as Russian oil companies struggle to raise production over the winter. By extending the deal into 2020, Russia could be in a better position to pump more during the spring of next year. The idea of a longer-than-expected extension was first mooted by President Vladimir Putin after he met Saudi Arabia’s crown prince at the G-20 in Japan on Saturday.

The International Energy Agency and other market watchers have pegged back forecasts for demand growth in recent months as China and India, the twin engines of global energy consumption, didn’t grow as fast as originally expected. At the same time, American shale production has set fresh records, putting the US on the brink of becoming a net oil exporter.

“The oil market is getting excited about the cut extension, but OPEC appears more and more worried about demand,” said Andrew Dodson, founder of commodity hedge fund Philipp Oil.

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