Saudi Energy Minister Prince Abdulaziz bin Salman attends a news conference that followed an OPEC meeting in Abu Dhabi, United Arab Emirates, Thursday, Sept. 12, 2019. OPEC's Joint Ministerial Monitoring Committee met Thursday in Abu Dhabi as estimates of lowered crude oil demand in 2020 have the cartel considering additional production cuts. Before the meeting started, Prince Abdulaziz again called for "cohesiveness" in OPEC. (AP Photo/Jon Gambrell)
Saudi oil minister Prince Abdulaziz bin Salman © AP

Oil producers from the Opec cartel will meet in Vienna on Thursday and will be joined by ministers from Russia and other exporters on Friday. Their task: to hammer out an agreement on how they will manage their oil production next year. Although there has been concern about global demand weakness and still-robust production from the US, the current Brent crude price just above $60 a barrel is seen by some producers as a comfortable level. 

Here are five things that oil market watchers will be focused on:

A deal on production cuts that is fit for 2020

The existing deal, stipulating supply cuts of 1.2m barrels a day, expires at the end of March 2020. Officials will decide this coming week whether these curbs need to be extended, or possibly deepened. Analysts expect the current deal to be dragged out into the middle of next year, or even beyond, with certain countries pushing for greater compliance. 

While Saudi Arabia, Kuwait and Angola have cut more than they should have under the deal, Iraq and Russia are among countries that have significantly underperformed. Giovanni Staunovo at UBS said keeping the current deal intact would be the most likely outcome and “the path of least resistance”. For producers, the danger is that some oil traders believe deeper cuts might be required to support prices.

Saudi brinkmanship and the Aramco IPO

Prince Abdulaziz bin Salman, the new Saudi oil minister, is expected to pressure countries that have not been holding up their share of the cuts to comply with the existing deal, people briefed on the kingdom’s position have said.

The seasoned oil diplomat is anticipated to take a much harder line than his predecessor, warning that if Opec peers do not enact their share of cuts fully in December and January, the kingdom will no longer shoulder the burden and could increase its own oil production. “Saudi Arabia is willing to do more than its share, but only if the others do their bit,” said Amrita Sen at consultancy Energy Aspects. 

The tough tactic could be a means for the oil minister to assert his authority over the group, but it carries risks. The kingdom needs higher oil prices, not least because as ministers meet in Vienna on December 5, shares in Saudi Aramco will be priced ahead of the long-awaited stock market flotation of the state oil company. 

Yet the people briefed on the kingdom’s position said Saudi Arabia believes the oil market will tighten in the coming months in any case, and officials are content with crude prices where they are — meaning they can bear that risk for now.

Will Russia drag its feet?

With Prince Abdulaziz now leading the Saudi delegation, the oil alliance between the kingdom and Russia will be under scrutiny. For decades the prince prioritised getting Opec peers and rivals on one side, recognising the importance of unity for the cartel’s long-term survival. 

After the oil price crashed in 2014, Saudi Arabia looked outside of the producer group, to Russia, for help. Under previous oil minister Khalid al-Falih, this relationship was a priority. Now Russia’s own willingness to comply with the deal is being examined. “Russia has exceeded the agreed production target in eight of the last 11 months,” said Carsten Fritsch at Commerzbank. 

Local oil companies have long believed that cutting production would only subsidise rival producers. Chief executive of Russian oil company Lukoil said recently that there is no reason right now to extend the cuts beyond March 2020. That all means Russia could be a wild card, but it is worth remembering that the country’s alliance with Saudi Arabia was not just about short-term oil prices, but a strategic relationship sanctioned by President Vladimir Putin. 

Supply pressure from outside Opec

The International Energy Agency said in November that Opec faces a “major challenge” next year as accelerating production from rivals undermines its efforts to rein in oil production. Alongside Russia producing more than it should under the deal, Opec is trying to get a handle on how much more room the US shale industry has to grow.

Paul Horsnell at Standard Chartered said the performance of US crude oil supply is the main variable for oil markets in 2020. “There is a wide range between forecasts, with one cluster pointing towards a sharp slowdown in growth and another looking for an acceleration,” he said. 

Additional barrels are also expected to come online from countries such as Brazil, Norway and Guyana. This means the number of barrels required from Opec to fill any gap is forecast to fall in 2020. This is part of the reason why some analysts believe that without deeper cuts to production by Opec and its allies, oil prices could feel some pressure in the aftermath of the meeting. 

Signs of weakness in global demand

A persistent trade spat between the US and China and global economic weakness has forced global oil agencies to roll back assumptions for demand growth for this year and next. With supply growth expected to swamp the rate of consumption, Opec has itself said that there are “signs of stress” that could hit demand.

David Fyfe, chief economist at price-reporting agency Argus, said oil producers faced a delicate balancing act. “Cutting output further to completely avoid global stock builds would push Opec market share to levels not seen on a sustained basis since the early 1990s.”

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