Opec will struggle to muster friends to extend output cuts in 2019

OPEC will struggle to carry all of its partners from outside the group along with it as oil producing group looks to extend output cuts into a third year at meetings to be held in Vienna in early December, writes Bloomberg oil strategist Julian Lee.

For key partner Russia, the decision will hinge more on President Vladimir's Putin’s assessment of its value in strengthening broader political ties with Saudi Arabia, than on any oil price impact. But Mexico, which offered up natural decline in its oil output as cuts last time around, may balk at extending its participation, as its output is forecast to grow next year.

Saudi oil minister Khalid Al-Falih told reporters that the baseline for new output cuts should be a recent production level, without offering a specific suggestion. While this might not be a problem for Russia, which boosted its output to a post-Soviet high in October, it will pose more of a challenge for others.

Below is a round-up of each country’s position and an assessment of its likely willingness to make further cuts for next year. The figures mentioned are for crude oil production and are from the International Energy Agency. Starting points for cuts in 2017 are October the preceding year, except for Kazakhstan, which was November.

Russia

Starting point for 2017 cuts: 11.229 million barrels a day

2017 output cut: 300,000 barrels a day

Implied 2017 output target: 10.929 million barrels a day

October 2018 production: 11.411 million barrels a day

Russia led the non-OPEC contribution to output cuts in 2017 and OPEC will be looking to Moscow to take a lead for any further reductions in 2019. Output jumped to a new post-Soviet record of 11.4 million barrels a day in October after Russia eased restraints on the country’s oil companies following the decision taken in Vienna in June to relax output cuts.

President Vladimir Putin said earlier this month that cooperation with OPEC to stabilize the oil market has shown “positive results,” but noted that an oil price “around $70 suits us completely.” He wouldn’t commit to cutting output to help support prices. Energy Minister Alexander Novak said producers need to “better understand both the current conditions and the winter outlook” before agreeing to a supply restriction.

Opinion: A decision to implement output cuts in 2019 will be a political one, based on President Putin’s assessment of how much it will help to strengthen ties between Russia and Saudi Arabia. The country has boosted output in recent months, allowing it to accept the October 2018 production level as a baseline for  any curbs in 2019.

A cut of 300,000 barrels a day using October 2018 as a baseline would leave Russia producing 11.1 million barrels a day in the first half of 2019, almost 200,000 barrels up on its target under the original deal.

Mexico

Starting point for 2017 cuts: 2.103 million barrels a day

2017 output cut: 100,000 barrels a day

Implied 2017 output target: 2.003 million barrels a day

October 2018 production: 1.81 million barrels a day

Mexico offered projected output decline as its contribution to the 2017 production cuts, but will not be in a position to do the same for 2019. Because the initial deal has lasted much longer than intended, Mexico’s output reduction has been larger than pledged, as the flow from aging fields has continued to fall.

Mexican state-owned petroleum company Petróleos Mexicanos,  known as Pemex, expects oil production to rise in 2019 to 1.85 million barrels a day, leaving the country’s new government with no natural decline to offer for next year.

In contrast, the International Energy Agency forecasts Mexico’s oil production, including crude and condensate, to fall to 1.99 million barrels a day in 2019 from 2.1 million in 2018, potentially leaving room for natural decline to once again be offered as cuts.

Opinion: Based on the Pemex forecast, securing a pledge for further output reduction from Mexico looks difficult and even if one is promised, the country’s ability to deliver a real cut in output is questionable.

Again, assuming Pemex is right, then Mexico’s oil production looks likely to remain flat in the first half of 2019 relative to an October 2018 baseline.

Oman

Starting point for 2017 cuts: 1.012 million barrels a day

2017 output cut: 45,000 barrels a day

Implied 2017 output target: 967,000 barrels a day

October 2018 production: 974,000 barrels a day

Oman’s Oil Minister Mohammed Al-Rumhy said earlier this month “there is a consensus that there is an oversupply and we need to do something,” suggesting that he may be willing  to continue his country’s production restraint in 2019. Output was cut by 49,000 barrels a day in December 2016, according to data compiled by Bloomberg, and compliance with cuts has consistently been at or above 80 percent. 

Opinion: Oman looks set to agree to extending output cuts at their current level. It may be less keen to accept a new, lower baseline for 2019 reductions, as it has not followed countries like Saudi Arabia and Russia in boosting output, according to production figures provided by the International Energy Agency.

Extending Oman’s output cut would give a 7,000 barrel a day reduction from an October 2018 benchmark.

Azerbaijan

Starting point for 2017 cuts: 814,000 barrels a day

2017 output cut: 35,000 barrels a day

Implied 2017 output target: 779,000 barrels a day

October 2018 production: 783,000 barrels a day

Like Mexico, Azerbaijan’s pledged output cut for 2017 reflected forecasts of the country’s oil production, rather than a voluntary cut. Oil production was forecast to drop by 3.7 percent, or around 31,000 barrels a day between 2016 and 2017.

The official outlook for 2019 is for production to increase by 1.7 percent, or around 13,000 barrels a day, compared with 2018 after BP began production from the second phase of its Shah Deniz gas and condensate project in the Caspian Sea.

Opinion: Securing a further output cut from Azerbaijan could prove difficult when output is expected to rise next year. Azerbaijan could extend the terms of the existing agreement, based on its October 2016 starting point, but may resist accepting a new, lower starting point for 2019 cuts.

Extending Azerbaijan’s commitment from the original baseline would yield no output cut  in the first half of 2019 versus the October 2018 output level.

Kazakhstan

Starting point for 2017 cuts: 1.768 million barrels a day

2017 output cut: 20,000 barrels a day

Implied 2017 output target: 1.748 million barrels a day

October 2018 production: 1.826 million barrels a day

The implementation of the OPEC/non-OPEC deal in January 2017 came just as Kazakhstan’s giant Kashagan project was ramping up production, making it all but impossible for the country to meet its pledged output target.

Magzum Mirzagaliev, Kazakhstan’s deputy energy minister, said earlier this month that OPEC+ should take a decision on output cuts when ministers meet in December. He added that Kazakhstan prefers the November 2018 output level as baseline for possible cuts. Based on daily figures for the first 20 days of November, production is running at a monthly average record of just under 2 million barrels a day, compared with 1.83 million in October after maintenance finished at key fields.

Opinion: Using record production in November 2018 as a baseline for cuts will make it easier for Kazakhstan to agree to extend the OPEC/non-OPEC deal into 2019. Its lack of compliance in 2017 and 2018, suggests that it may well be prepared to sign up to a deal and then ignore its commitment. 

Kazakhstan’s oil production in the first half of 2019 would be around 160,000 barrels a day higher than the October 2018 level, assuming no unexpected disruptions over the winter.

Malaysia

Starting point for 2017 cuts: 644,000 barrels a day

2017 output cut: 20,000 barrels a day

Implied 2017 output target: 624,000 barrels a day

October 2018 production: 622,000 barrels a day

Malaysia’s crude oil production has fallen sharply in recent months after reaching a six-month high of 675,000 barrels a day in July. On average since output cuts were introduced in January 2017, Malaysia has been producing above its baseline production level, let alone its target level and the  country’s compliance has been the third worst in percentage terms, behind Kazakhstan and South Sudan.

A slump in production since July has left Malaysia producing below its pledged level in October, which could leave it facing a low starting point for renewed cuts, if last month’s production level is put forward as a new baseline.

Opinion: Even if Malaysia signs up to a new output deal for 2019, there must be real questions over whether its compliance will be any better than it has been to date.

The recent slump in output will make it hard for Malaysia to cut output from an October 2018 baseline in the first half of next year.

Bahrain

Starting point for 2017 cuts: 213,000 barrels a day

2017 output cut: 10,000 barrels a day

Implied 2017 output target: 203,000 barrels a day

October 2018 production: 204,000 barrels a day

A jump in Bahrain’s oil production in the second half of 2016 meant that its baseline for output cuts was significantly above the country’s normal production level. Production has not risen since the deal was relaxed in June, according to data from the IEA, meaning that any further cuts would be from a lower baseline.

Opinion: Bahrain’s dependence on its larger neighbors, principally Saudi Arabia, means that it is very likely to support a new output deal for 2019 if asked to do so.

Bahrain will probably agree to cut output by another 10,000 barrels a day from an October baseline.

South Sudan

Starting point for 2017 cuts: 104,000 barrels a day

2017 output cut: 8,000 barrels a day

Implied 2017 output target: 96,000 barrels a day

October 2018 production: 100,000 barrels a day

Opposing factions in South Sudan’s almost five-year civil wear signed a peace agreement in August that could pave the way for output to resume from fields in the north of the country. The government expects output to resume by year-end at the 45,000 barrel-a-day Unity field, Mayen Wol Jong, undersecretary in the Petroleum Ministry, told reporters in October, with the 80,000 barrel-a-day Thar Jath field expected to restart production next year.

Consultants Wood Mackenzie Ltd. warn that “the power-sharing accord agreed in August is unlikely to lead to long-term political stability.” A “more realistic and concrete peace deal between the government and rebels” is needed for a return to pre-2011 production levels of around 350,000 barrels a day.

Minister of Petroleum Ezekiel Lol Gatkuoth said in May that the country had agreed to cut production from pre-conflict output levels of 350,000 barrels a day. This contrasts with the 125,000 barrels a day reported by the IEA as the baseline for the cut.

Opinion: Securing a real output cut for 2019 from South Sudan, using recent actual production as a baseline will be impossible at a time when the country is looking to restore flows to pre-conflict levels. It may agree a reduction from a pre-conflict baseline, but this would not deliver any real cut. If the peace deal holds, South Sudan expects output to double next year.

Production in South Sudan is already rising as fields are brought back into production. Output in the first half of 2019 could be at least 60,000 barrels a day higher then in October, if the peace deal holds. 

Brunei

Starting point for 2017 cuts: 125,000 barrels a day

2017 output cut: 4,000 barrels a day

Implied 2017 output target: 121,000 barrels a day

October 2018 production: 96,000 barrels a day

Like other countries with naturally declining output, Brunei’s oil production has fallen further than it pledged, as the initial output cuts have lasted much longer than originally envisaged. With inward investment focused on the downstream oil sector, output is unlikely to rise in the short term.

Opinion: Brunei may be in a position to offer further natural decline from a new baseline as its contribution to 2019 output cuts. The volume will, again, be too small to make any material difference to global oil balances and the country’s participation will be largely symbolic, important more as another name to add to the list of participants than for its material contribution.

Brunei may deliver another 4,000 barrels a day cut from an October 2018 baseline.

Sudan

Starting point for 2017 cuts: 76,000 barrels a day

2017 output cut: 4,000 barrels a day

Implied 2017 output target: 72,000 barrels a day

October 2018 production: 70,000 barrels a day

Like several other non-OPEC participants in the 2017 output cuts, Sudan’s oil production is in decline and its pledged reduction was no more than a reflection of that trend.

Opinion: Sudan, like Brunei, will be able to offer further natural decline as a contribution to a 2019 deal. Like Brunei, its participation is largely symbolic.

Sudan may deliver another 4,000 barrels a day cut from an October 2018 baseline.

Note: Equatorial Guinea has been excluded, as it is now a member of OPEC.

Note: Julian Lee is an oil strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice.