OPEC and its allies agreed to slash crude production by 1.2 million bpd in 2019 when they met in Vienna on December 7th. While this defied the expectations of many industry observers, some forecasters believe that an even larger reduction is required to rebalance the oil market and restore prices.

According to Bjornar Tonhaugen, the head of oil market research at Norwegian consultancy Rystad Energy, pushing Brent back up to $70 a barrel in the New Year would require an additional 700,000 bpd cut in output from OPEC+, which includes non-members like Russia.

“The OPEC+ agreement predictably came up short of what Rystad Energy argued would be required to fully balance the market in 2019,” he said. “The agreed production cuts will not be enough to ensure sustained and immediate recovery in oil prices. The muted market reaction seen thus far comes as no surprise to us.”

OPEC-14 (excl. Qatar) crude production, monthly

Source: Rystad Energy

Tonhaugen’s commentary follows a recent note to clients that contained timely insight about the implications of the OPEC+ agreement. He wrote:

  • The agreed OPEC+ production cuts will not be enough to ensure sustained and immediate recovery in oil prices
  • The decision does stand as a Christmas gift to budget-setters in the US shale industry, where the relentless growth in production is set to continue through 2019 and beyond
  • OPEC+ succeeds in preventing massive over-supply in the first half of 2019 and in putting a soft floor under oil prices for now
  • If production cuts by OPEC and Russia are extended through 2019, the market can balance
  • Most likely, OPEC will be forced to conduct production management sporadically over the next few years, unless US shale supply grows even faster than currently expected, in which case OPEC will likely step back and allow oil prices to crash

OPEC+ was the focal point of the December 2018 edition of Rystad’s Oil Market Update Report, which was issued in advance of the Vienna meeting but represents the firm’s latest short and medium-term oil market outlook. Click on the link below to download the 19-page document in full for free.