Oil ministers at the recent Opec+ meeting have announced additional cuts of 500,000 barrels per day (b/d), split between Opec member participants (-370,000 b/d) and their non-Opec counterparts (-130,000 b/d), a report said.
This brings official Opec+ cuts to 1.7 million b/d, from 1.2 million b/d announced in 2018, added the BofA Global Research report.
In addition to the formal Opec+ cuts, Saudi Arabia announced that it would continue its accommodative policy, cutting a further 400,000 b/d, and raising unofficial Opec+ cuts to 2.1 million b/d. Compliance thus far has been solid, owing to Saudi, but target levels announced today may be harder to meet.
The agreement will reduce quotas further for several Opec+ participants that were unable to deliver on previous quotas, casting doubt over compliance levels in 2020, the report said.
“As we anticipated in our 2020 balances, Saudi Arabia will continue to over-comply with its stated quota, producing 9.7 million b/d. Prince Abdulaziz bin Salman's direct confirmation of these plans during the post-meeting press conference should provide some solace to those concerned about Opec+'s ability to comply with new, lower quotas,” the report said.
In addition to Saudi, several countries, including the UAE (-60,000 b/d), Kuwait (-55,000 b/d), and Russia (-70 ,000b/d) have pledged large quota reductions. Iraq remains a key focal point for Opec+ critics. In 2019, Iraqi production has averaged more than 200,000 b/d above its previously agreed quota levels, and today's agreement reduces their quota by an additional 50,000 b/d.
Opec members signaled their intention to prevent stock builds during 1Q19, which is a seasonally weak period for demand.
“We forecast a surplus of 700,000 b/d in 1Q and in an optimistic scenario, where Opec members of the agreement meet the agreed targets, inventory builds are reduced by 200,000 b/d. The Saudis will be closely watching compliance levels and will review market conditions in March 2020 at an extraordinary meeting,” the BofA Global Research report said.
“If other members are producing egregiously above their targets, Saudi may opt to boost output to its agreed quota levels. Strong compliance, coupled with other positive economic developments, such as a pick-up in global inventory restocking and a small US-China trade deal, could push Brent to our $70 price target ahead of schedule,” it noted.
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