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Analysis: OPEC’s proposed cuts in global oil supply may not affect oil prices

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ON Thursday, the ministerial panel of key Organisation of Petroleum Exporting Countries, OPEC, producers and its allied countries OPEC+ pushed for the expansion of agreed oil production cuts by 500,000 barrels per day to ensure a balanced market in 2020.

Oil prices rose slightly by 4 per cent on Thursday following the deliberations by OPEC members to agree on deeper output cuts in a bid to raise oil prices and prevent an oversupply next year.

The benchmark price of Brent crude climbed to $63.50 a barrel on Thursday, up from a slump of $55 a barrel in August but below its 2019 high point of about $75 a barrel earlier in the year.

At the OPEC’s ministerial meeting in Vienna, Austria it was agreed that oil-producing states increase their production cuts by an additional 500,000 barrels per day to the current level of 1.2 million barrels per day which is set to end in March 2020 according to a Reuters report.

Timipre Sylva, Nigeria’s Petroleum Minister for State confirmed after the meeting that the cuts would be adhered to reduce its oil production further “if it is absolutely necessary.”

“It would be difficult for us, but if you don’t have any option, what are we going to do? We have to cut,” he said.

Russian energy minister, Alexander Novak said there would be calls for the OPEC+ coalition to meet again in the first week of March to review the deal and extend it, if warranted, through the rest of 2020.

“By then we will have a better understanding of the market’s development and forecasts of summer demand and supply. We really do see some risks of oversupply in first-quarter connected with a seasonal drought of demand,” he said.

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This means that OPEC and it’s allied countries led by Russia will reduce their global production output of crude oil by 1.7 million barrels per day until it is reviewed in March 2020.

In September 2016, OPEC announced a reduction target of crude oil supply by 800,000 barrels per day and in November of the same year, it adjusted its supply cuts to 1.2 million barrels per day. Between 2016 to 2019 OPEC has announced seven major oil cuts to raise global oil price.

However, the frequent oil production cuts by OPEC with the aim of raising global oil prices have shown that OPEC’s restriction of global oil supply is no longer a reliable means of forcing higher prices in the international oil market.

The United States of America, USA, is currently the world’s largest producer of crude oil with a crude oil production of 12.3 million barrels per day due to its increased shale oil production while OPEC’s major producers namely Russia and Saudi Arabia lags at 10.53 and 10.3 million barrels per day.

Increased shale operations from the US and Canada while rising production in other non-OPEC countries such as Brazil and Norway threatens to add to the oil glut.

However, OPEC and OPEC+ members control about half of the world’s production which is not enough to force prices down but forecasts indicate a market surplus has met lower seasonal demand.

The Head of Oil Market Research at Rystad Energy, Bjørnar Tonhaugen, predicts that with oil glut large global implied stock builds the price of crude could fall lower than it did in 2016.

“We have a clear message to the OPEC+ countries, A ‘roll-over’ of the current production agreement is not enough to preserve a balanced market and ensure a stable oil price environment in 2020.

“With potential stock builds of 2.3 million barrels per day, oil prices could fall below $30 per barrel lower than during the previous lows of 2016. Such a scenario would be devastating for the forward curve structure as potential stock builds would be larger than what we have observed historically,” he said.

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