OPEC’s production cut: Should India worry?

OPEC logo seen at it's headquarters in Vienna, Austria (REUTERS/Leonhard Foeger)

Ruchi Agrawal
Moneycontrol Research

Highlights
- OPEC’s Vienna meet ended with a production cut pact of 1.2 mbpd
- Iran, Libya and Venezuela are exempted from cuts for now
- Russia negotiates a mere 200,000 barrels per day cut- Crude prices see support, but we remain bearish on oil for the long term

The Organisation of Petroleum Exporting Countries’ (OPEC) Vienna meeting finally concluded with an agreement over production cuts till April next year. The cartel and its partners have agreed to reduce production by close to 1.2 million barrels per day (mbpd) from the market, with OPEC constituents committing 800,000 bpd. This led to a surge in crude prices on December 7, although prices have since cooled.

With producers agreeing to use October production levels as baseline for calculating the cuts, actual barrels that would go off the table would be higher than cited, since production was lower in that month. But OPEC producers have been notorious in not complying with quotas in the past.

Iran emerged as a winner from the tense negotiations, securing an exemption from the cuts, citing adverse impact on exports due to US sanctions. While Russia played the key broker between rivals Iran and Saudi Arabia, it negotiated an attractive deal of around a 200,000 bpd cut for itself, which is less than what was expected due to freezing of wells in approaching winters. With a production decline owing to internal challenges, Libya and Venezuela were exempted from the proposed cut.

This move might see some opposition from US as President Donald Trump has been vocal against the cuts and higher crude prices for some time. Given the about $45 per barrel break-even level of US shale oil production, the move comes as a relief for shale producers, as stability in prices gives them an incentive to continue production.

Though decision of a cut in production provides some support to crude oil prices in the short run, its sustainability remains to be seen. Indeed, sustaining the recent highs it scaled about two months back in the longer term would be a challenge.

With US pipelines scheduled to enter production in the middle of 2019, we expect supplies to rise. On the demand side, crude oil is facing a structural demand shift to renewable energy sources. Due to this, we believe very high artificially supported crude prices levels would be difficult to sustain. The recent meeting has underlined OPEC’s dependence on Russia to make production cuts work, a signal of the cartel’s declining clout. In the shorter run, while crude prices might see some support, we remain bearish on the overall crude prices in the longer term. For an energy importer such as India, this should be music to her ears.

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