OPEC Dec'19 meeting Preview - Deeper production cuts unlikely

OPEC will be starting their 2-day meeting from today in Vienna and will discuss about 2 key questions - deepening output cuts and even extending them to Dec-2020. It may be recalled that the current 1.2 mil bpd cuts will expire in March 2020.

In trying to get a boost for their Aramco IPO, Saudi Arabia wants OPEC members to provide the right platform to deliver on this. As such, we're seeing the calls for potentially deeper and longer cuts going into today's meeting. They even reportedly threatened to scale back on their over-commitment if that is what it takes to get OPEC+ members to comply with current quotas. On the other side, Russia's outspoken reluctance to deeper cuts as demand during the winter starts in December and Russian companies seek to boost their output to support the state budget.

If OPEC sticks to the script and merely extends the production cuts by three-six months, the rise can be limited given that crude has rallied 2% in this week itself. Armaco IPO which finished on Sunday will keep providing floor to the oil prices in the interim. Deepening of production cuts is unlikely and will be seen as a surprise decision as we see little support by OPEC members.

One of the key reasons why OPEC output cuts have worked as well as they did owes much to the US drawing up sanctions against Iran and Venezuela. So, if that stays in place and the existing pact is extended to Dec 2020, it pretty much reaffirms the status quo and the focus will turn towards supply instead. In that lieu, the focus will turn towards US shale producers and whether or not they can support the narrative that the market will be heavily supplied next year.


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