• 1.2 million bpd output cut will stabilise oil prices around USD65-70 in the near term: The Joint OPEC-non-OPEC Ministerial Monitoring Committee (JMMC) meeting in Vienna saw the group known as OPEC+ (OPEC plus allies led by Russia) agreeing to cut oil production by 1.2 million barrels per day (bpd), with 800,000 bpd from OPEC and 400,000 by others.
• Oil bear market that prompted supply cuts was a confluence of several factors: The price of crude has shed USD20 a barrel since its four-year peak of USD86 a barrel reached in October, as a result of three factors: higher-than-expected global crude output because of US shale production; US waivers for large buyers of Iranian crude which reduced the impact of its sanctions on total oil supply; and expectations of weaker demand for oil.
Assessment: Much uncertainty remains for the outlook of crude prices despite output cuts
While we think that oil prices will be supported in the near-term by the 1.2 million bpd cut, there are multiple sources of uncertainty surrounding the outlook for crude prices. First, international censure of Saudi Arabia over the killing of journalist Jamal Khashoggi may grow, upping the pressure on the de-factor OPEC leader to acquiesce to demands from President Trump for lower crude prices.
Second, the contentious manner in which the negotiations were conducted, with producers such as Libya, Nigeria and Venezuela hankering for exemptions from output cuts claiming economic hardship, suggests that the buy-in on the part of oil producers is weak. Thus, cartel discipline in maintaining production cuts may fray.
However, this does not necessarily mean that oil prices will fall again.
Much will hinge on political risks in the Middle East which we think will worsen: Iran suffered yet another terrorist attack which it blamed on Saudi Arabia and its allies. There continue to be hints of Israeli action against Iranian targets in Iraq and Syria. The Iranian threat to disrupt shipping of oil through the Hormuz straits has not gone away, especially in an environment of increasing hostility, led by US President Trump. The Palestinian territories are seething with tensions as well. The litany of political risks surrounding major production centres for crude makes us think that the risk premium in oil prices is likely to spike up in the coming months.
In addition, the impact of US waivers on specific countries buying oil from Iran will be limited as the waivers are for a limited period only. The US strategy is to ensure that sanctions on Iran cause it such pain that the Iranian regime would either concede to US demands or be ousted in an uprising.
Lastly, global economic activity is easing but a recession is not on the cards: the latest OECD Composite Lead Indicators (CLIs) show that large emerging economies and China – economies where oil demand is much more leveraged to growth, will continue to gain momentum. This means that demand for crude will continue to grow, albeit a bit slower than before.
In short, the fall in crude prices is likely to be arrested in the near-term as a result of the outcome of
the JMMC meeting which yielded a modest production cut to the tune of 1.2 million bpd, but there is
considerable uncertainty beyond that as to the trajectory of prices.