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Home / Markets / Mark To Market /  The impact of Opec’s production cuts

On Friday, the Organization of the Petroleum Exporting Countries (Opec) and its non-Opec allies (together called Opec+) decided to cut oil production by another 500,000 barrels per day (b/d).

This is over and above the production cut of 1.2 million b/d (m b/d) announced in December last year. Additionally, several participating countries, mainly Saudi Arabia, will continue their additional voluntary cuts in production, leading to adjustments of about 2.1 m b/d. The latest cuts will be effective for the March quarter (Q1 CY20).

But analysts are not too gung-ho about the impact of these cuts.

Sugandha Sachdeva, vice president (metals, energy and currency research) at Religare Broking Ltd, says, “Considering the fact that Opec has just formalized the additional supply cuts which they have been adhering to for most part of 2019, crude oil prices do not seem to be witnessing a sharp upswing." In other words, the latest production cuts do not change things materially.

Brent crude prices increased by 1.6% on Friday.

According to ICICI Securities Ltd, if Opec+ delivers on agreed cuts and continues cuts in Q2, it estimates supply surplus of 0.78-0.96 m b/d in Q1-Q2 CY20 at International Energy Agency’s (IEA’s) estimated demand and non-Opec output estimates.

The brokerage firm has retained its Brent crude price estimate at $60 per barrel for CY20.

But there are risks. “Supply surplus and therefore weaker oil prices are likely in H1CY20E if Iraq and Nigeria continue to overproduce, non-OPEC output ramp up is in-line with IEA estimates and demand is weaker than expected," added ICICI Securities.

Among other variables, investors will keep a close eye on whether the production cuts will be extended beyond March.

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