Oil Futures Advance on OPEC Cuts

Brian L Milne
By  Brian L. Milne , DTN Refined Fuels Editor

CRANBURY, N.J. (DTN) -- New York Mercantile Exchange oil futures nearest delivery and Brent crude on the Intercontinental Exchange registered gains on the session and the week, climbing on news the Organization of the Petroleum Exporting Countries and their 10 non-OPEC allies led by Russia reached an agreement reining in production during the first half of 2019 in an effort to halt a slide in world crude prices.

In a news release early afternoon Friday, OPEC confirmed 1.2 million barrels per day (bpd) in production cuts by OPEC+, with OPEC accounting for 800,000 bpd of the supply reduction and non-OPEC producers 400,000 bpd.

The accord reached Friday was in doubt through Friday morning, with OPEC unable to reach agreement Thursday ahead of their meeting Friday with Russia and other non-OPEC oil producers. News accounts suggest tough negotiations, including between Saudi Arabia and Russia, with Saudi Energy Minister Khalid al-Falih telling counterpart Alexander Novak that Moscow would need to boost the level of their proposed cut or an agreement wouldn't be reached.

OPEC didn't provide a breakout of country quotas, although exemptions were granted to Iran, Libya, Venezuela and Nigeria, because of economic issues. Libya and Nigeria were exempted from the previous accord as well, while Iran is the target of U.S. sanctions on its oil exports and refused to reduce their output target, which would have been symbolic.

Iranian oil production has been in decline since May when the United States announced it would pull out of the Iranian nuclear accord that meant the re-imposition of U.S. sanctions. OPEC data shows Iranian crude production dropped 527,000 bpd from April to 3.296 million bpd in October, a 31-month low. November data is due out Dec. 12.

Venezuela, a country whose economy has collapsed amid failed socialism that has burgeoned into dictatorship, is producing at a multi-decade low. Reports indicate Venezuelan President Nicolas Maduro reached a deal with Russia Friday in which Russia would invest $6 billion into the South American economy. Reports also indicate the United States is considering additional sanctions on Venezuela. Venezuela's oil minister will become OPEC president in 2019 amid the cartel's rotating presidency.

Additionally, Qatar will withdraw from OPEC at year's end.

The 1.2 million bpd cut was below the 1.3 million bpd reduction recommended by an OPEC panel late last week, with the smaller size of the cut cheered Friday morning, although crude prices moved off early highs as the session wore on.

How the cuts will be made is another technicality that could cap the upside. The Wall Street Journal is reporting Russia will reduce output by 230,000 bpd and Saudi Arabia by 250,000 bpd. The quotas align with a demand by al-Falih that the Saudis wouldn't agree to a deal without equal cooperation from other members, and appears to have succeeded in boosting Russia's contribution above Moscow's initial 150,000 bpd proposal. However, the cuts still leave production rates by Russia and Saudi Arabia very high, with al-Falih this week indicating Saudi output at a record 11.2 to 11.3 million bpd.

Russia's oil companies were loath to agree to any cut, wanting to continue pumping at higher rates following heavy investment in the upstream sector and reportedly are stealing market share from Iran. Russia's oil production reached an 11.41 million bpd post-Soviet high in October.

As the Moscow-Riyadh partnership lives on and OPEC's cohesion frays, record-high production in the United States was clearly a factor in OPEC+ negotiations. The Energy Information Administration reports U.S. crude production at 11.7 million bpd in November while federal data also showed the United States became a net-exporter of crude and oil products during the final week of November for the first time in decades, with net imports at minus 211,000 bpd. U.S. crude exports surged to a record high 3.203 million bpd. These are worrying statistics for OPEC.

ICE February Brent futures, as might be expected, gained the most Friday, settling up $1.61 on the session and $2.96, or 5.0%, on the week at $61.67 per barrel (bbl). The spot-month contract did back off a two-week high of $63.73 bbl. NYMEX January West Texas Intermediate settled up $1.12 at $52.61 bbl and on the week advanced $1.68, or 3.3%, but held below this week's $54.55 high, trading intra-session at $54.22 bbl.

Nearest-delivered Brent futures settled at a $9.06 bbl premium to WTI, a 2-1/2 week high.

Oil products also walked back sizeable gains posted in early trading, with NYMEX January ULSD futures settling up 2.8 cents at $1.8862 gallon after trading as high as $1.9534 gallon. On the week, ULSD futures advanced 4.07 cents, or 2.2%. NYMEX January RBOB futures settled up 5.24 cents at $1.4858 gallon, pushing the weekly advance on a spot month basis to 4.45 cents, or 3.31%, with a $1.4858 gallon settlement.

The move lower from the highs coincided with steep losses in major equity indices, with the Dow Jones Industrial Average down more than 550 points late Friday afternoon. The jittery market has heightened concern over a slowing world economy amid worry over trade wars and higher borrowing costs, with the Federal Reserve expected to hike the federal funds rate at their next policy meeting on Dec. 18-19.

In less than a week's time since a truce was reached between the United States and China in their trade dispute, some market followers believe the agreement is already unraveling. Those concerns were heightened this week on news of the arrest of Huawei executive Meng Wanzhou in Canada who faces possible extradition to the United States for allegedly violating sanctions against Iran. The Chinese technology company has been closely watched in western countries over concerns of spying for Beijing.

Investors were also unnerved after the spread between five-year and two-year treasuries inverted earlier this week, a potential signal for recession within the year. That signal was reinforced by Friday's employment report from the Labor Department that determined 155,000 jobs were created in November, down from expectations for monthly job growth of 190,000.

Brian L. Milne can be reached at brian.milne@dtn.com

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Brian Milne