OPEC’s Next Meeting May Unveil New Approach to Cuts

SP Futures according to Bloomberg (October 18, 2019) - As the clamor grows for OPEC to slash even more oil production, and the cartel vows to consider any necessary action, its next meeting could result in an unusual step: a preemptive supply cut.

The Organization of Petroleum Exporting Countries and its partners -- known as OPEC+ -- have reduced output this year to contain a glut created by faltering oil demand and surging U.S. shale supply. Amid forecasts of a new surplus next year, there’s a chorus of calls from Morgan Stanley (NYSE:MS) to Commerzbank AG (DE:CBKG) for the alliance to deepen the curbs when it meets in Vienna in December. But in recent months global markets have grown tighter, removing any immediate need to act. If extra cutbacks are announced, it would mark a break with tradition for the cartel, which typically waits for a glut to emerge before responding.

Depressed oil prices may compel the group to change its habits. Crude has slumped about 20% in six months to around $59 a barrel in London -- below the levels most OPEC nations need to cover government spending -- and on Friday headed for a weekly loss of 1.4%. A renewed sell-off in 2020 would squeeze revenues even further.

‘Daunting’ Stockpiles

OPEC+ agreed to cut output by 1.2 million barrels a day this year, a reduction that has been compounded by a range of crises, from sanctions on Iran to a missile attack on Saudi Arabia’s oil-processing facilities. Nonetheless, traders and consultants from Gunvor Group Ltd. to Rystad Energy AS recommend a further cutback when OPEC+ meets on Dec. 5-6.

“If by December there are clear signs of economic weakness, then a further deepening by a minimum of 500,000 barrels a day would be highly likely,” said Ed Morse, head of commodity research at Citigroup Inc (NYSE:C). in New York.OPEC’s top officials have signaled they’re prepared to consider this. Secretary-General Mohammad Barkindo said the group will do “whatever it takes” to prevent a market slump and that members are willing to “put all options on the table.”

 Even Russia’s President Vladimir Putin, who leads OPEC’s most important, yet often reluctant ally, has said he recognizes the need for further cooperation.

Tardy Approach

In the past, OPEC has more typically been criticized for acting too slowly. When a surplus brews, members are reluctant to gamble that sacrificing sales volumes will be compensated by higher prices. There’s also the inevitable haggling over how much each nation should cut.

When OPEC assembles at its Austrian headquarters in December, global markets probably won’t be telegraphing any immediate surplus to be dealt with.World oil inventories contracted in the third quarter by the most in a decade, falling by 228 million barrels, according to OPEC, as summer demand proved surprisingly robust and the group’s deliberate cutbacks were amplified by disruptions in Iran, Venezuela and Saudi Arabia.

Stockpiles are poised to shrink further in the fourth quarter, even if the kingdom has fully restored output from the Sept. 14 missile and drone strikes, the IEA estimates. Inventories may decline by about 55 million barrels.