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Interpretation Of OPEC's New Production Quotas

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Includes: AOIL, ARMCO, BNO, DBO, DTO, DWT, NRGD, NRGO, NRGU, NRGZ, OIL, OILD, OILK, OILU, OILX, OLEM, OLO-OLD, SCO, SZO, UCO, USAI, USL, USO, USOD, USOI, USOU, UWT, WTID, WTIU, YGRN
by: Robert Boslego
Robert Boslego
Portfolio strategy, oil & gas, medium-term horizon
Summary

Press release implies cuts of 2.1 million barrels per day.

But the base number on which they are based was missing.

My calculations show a net reduction of 100,000 b/d from November.

And it is doubtful Russia can comply.

A large global stock build should still be expected.

OPEC issued a press release on December 6th that stated:

The 7th OPEC and non-OPEC Ministerial Meeting, hereby decided for an additional adjustment of 500 tb/d to the adjustment levels as agreed at the 175th Meeting of the OPEC Conference and 5th OPEC and non-OPEC Ministerial Meeting. These would lead to total adjustments of 1.7 mb/d. In addition, several participating countries, mainly Saudi Arabia, will continue their additional voluntary contributions, leading to adjustments of more than 2.1 mb. This additional adjustment would be effective as of 1 January 2020 and is subject to full conformity by every country participating in the DoC."

In the press conference following the Meeting of OPEC+, the oil ministers tried to clarify the numbers and why "this time will be different," to quote Saudi Energy Minister, HRH Prince Abdul Aziz Bin Salman. The message was all OPEC and non-OPEC countries are re-committed to abiding by the 2018 agreement to reduce production by 1.2 million barrels per day.

It had been widely reported that Russia, Iraq, Nigeria, and Kazakhstan had not been abiding by their quotas. The ministers from Iraq and Nigeria were there to explain the difficulties they had experienced. In Iraq's case, the federal government did not have control over the full production of the country, and now, it does. In Nigeria's case, crisis was cited, but by the end of November, both countries had reduced production to their quota levels. No explanation was given by the ministers of Russia or Kazakhstan.

In addition, the producers agreed to reduce production by an additional 500,000 b/d, according to the schedule:

According to my calculations, that would reduce OPEC's production to 29.59 million barrels per day. OPEC's production in November was 29.54 mmbd.

In addition, Saudi Arabia would reduce its production by 400,000 b/d below the new quota, which the energy minister calculated to be 9.744 mmbd. However, KSA's production in October was reported to be 9.890, and so, that is a reduction of about 150,000 not 400,000 b/d. Using the figures above, OPEC's new production in 1Q20 would be 29.44 mmbd, only 100,000 b/d lower than November.

At issue is how Russia is going to achieve a total quota reduction of 300,000 b/d (228,000 + 70,000). They have previously explained many times that they do not have much control over reducing production in the winter months without causing field damage.

Conclusions

The reduction of 2.1 million barrels per day in the press release does not add up or was based on some previous high number that was not provided. In any event, the new production quota will be only about 100,000 b/d below actual November production, which is not much of a change. Global stocks are therefore likely to build at their fastest rate since 2016 for the first quarter (see link).

Prince Salman commented on the Saudi Aramco (ARMCO) IPO at the end of the conference. He predicted the company's valuation of $1.7 trillion would exceed the $2 trillion mark within a few months of trading which starts December 11th.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.