OPEC could move to implement a new production cut agreement

The fall of oil prices could lead the OPEC to implement a new production cut agreement

Falling crude prices could lead the Organization of Petroleum Exporting Countries (OPEC) to implement a new production cut agreement, hoping to convince Saudi Arabia to reduce its output in order to boost prices.

On Sunday (11/11/2018), OPEC members will meet to decide the future of the oil market. Sources close to the organization stated that a possible deal would depend on factors such as Iranian exports after new U.S. sanctions, especially considering the exemptions implemented to allow the nation’s main buyers to maintain commercial relations.

These sources told Reuters that the exemptions that will enable it to continue trade relations with China and India came as a surprise to Iran. This measure had a negative impact on oil prices.

In view of this, Saudi Arabia wants to prevent a collapse in oil prices, already trading at under $70 per barrel. Therefore, the nation is leading the discussions for a production cut in 2019.

Existing production cut agreement

The cartel already has a production cut deal, under which the members pledged to reduce output by 1 million barrels per day. However, unexpected situations such as the production crisis in Venezuela and Libya led to a scenario of over-compliance with the agreement.

By the first quarter of 2018, production was down by 1.8 million barrels per day. Prices skyrocketed and the OPEC met once again to resume the original agreement and reduce output by 1 million bpd.

Although OPEC members have complied with the agreement, U.S. and Russian production increased significantly. Currently, both counties are nearing historic production highs, which led to a decline in prices.

Future meetings

The Joint Ministerial Monitoring Committee is set to meet in Abu Dhabi on Sunday ahead of the Vienna meeting scheduled for December 6-7. These talks should result in an agreement for 2019.

“There is a general discussion about this (cut). But the question is how much is needed to be reduced by the market,” one of the sources said in Abu Dhabi on Sunday.

“No one expected the waivers. Saudi Arabia wants to at least put a floor under oil prices. No one wants a free fall in prices,” the source added.

Kazakh deputy energy minister Magzum Mirzagaliyev told reporters in Abu Dhabi that he understood Saudi Arabia was suggesting using August-October output levels as a baseline for determining cuts.

The role of Venezuela

Venezuela has been an unintentional protagonist in this situation. Over-compliance with the production cut agreement was largely due to the decline of the country’s oil industry, as well as Libya.

After producing around 3.254 million barrels per day in 2008, a decade later the nation’s output now stands at a little over one million bpd.

Venezuelan oil minister Manuel Quevedo stated that his country expected to “considerably increase production next year.”

According to the official, Venezuela is currently producing 1.5 million barrels per day, which it expects to increase by one million in 2019. Nonetheless, according to the data provided by the government to the OPEC, its production barely surpasses 1.3 million barrels. Even worse, according to secondary sources, the official figures are under 1.2 million bpd.

Quevedo assured that if the OPEC reached a new production cut agreement, Venezuela would comply, despite its plans to increase output.

“Many of us share that opinion,” the minister said when asked about the need for new cuts.

He also took the chance to ensure that state-owned oil company PDVSA will honor its commitments and international debts.

For more information, check Energía16

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