OPEC+ agreed to cut oil output further, by +500K bpd, effective March 2020. A formal agreement will be released on Friday. The 11 OPEc members would share 350K bpd of the cut while the 10 non-OPEC producers would share the remaining 150K bpd.

While awaiting more details about the production cut, we find the meeting outcome more dovish than expected. Saudi Arabia has the mission to push oil price higher ahead of Saudi Aramco’s listing. Yet, the kingdom noted that it would raise production other producers do not comply with their assigned quotas. There was little discussion about an extension of the current agreement. Compliance has varied among OPEC+. According to Thomson Reuters’ data, Angola and Saudi lowered their output more than needed by 6 times and 2.5 times, respectively, in the month of November. However, some countries, such as Gabon and Nigeria and Congo, raised production during the month.

Meanwhile, Russia demanded that the new condensate output should be exempted from quota, as the production aims at domestic use rather than exports. If this request is entertained, other OPEC+ producers, such as Nigeria, might also demand reclassification of their crude oil output as condensate. Consequentially, this would destabilize the oil market, leading to a flood of unexpected supply. S&P’s estimated that Russia’s condensate production increase by +50K bpd in 2 years’ time from the current 700K bpd. In previous meetings, Russia had the tendency to oppose further cut but eventually agreed to the new quota. However, its compliance has drawn criticism from other producers, in particular when some have been producing much less than required. Regarding this, Russia’s energy minister Alexander Novak defended that the country’s compliance level reached 85.5% in November, and is aiming at full compliance in December.

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We expect further output cut would be needed to maintain the demand/supply balance, amidst global economic slowdown. Yet, some producers may not be eager enough to commit for now. First the current deal will continue until March 2020. Some members might prefer to gauge the economic situation before making decision. This is what has been proposed by Russia. Second, some producers can be frustrated by the lack of compliance of others. They are reluctant to continue supporting the price by themselves.

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