OPEC production: Any cuts will be from a high base - Westpac

Martina Song, Research Analyst at Westpac, suggests that OPEC’s announcement on Wed that it was considering limiting production was a surprise; the agreement had seemed unlikely given Saudi Arabia’s opposition to reducing supply if Iranian production was not also curbed.

Key Quotes

“The initial plan is for OPEC to reduce production by 250-750k barrels per day to 32.5-33mbpd. Iran would be allowed to increase its production slightly while Nigeria and Libya would also be exempt on “exceptional circumstances”. Details however, like how much each country would cut by, will likely not be finalised until OPEC’s Nov 30 ordinary meeting.

While markets took the news well – crude rallying over 5% - the impact on global production may be limited. The policy of defending market share has seen OPEC and Saudi Arabia volumes at records in recent weeks (chart across). Seasonality should see volume drop off in coming months. US production too has been more resilient than many expected. The rig count has increased since its lows in May of 316. At 418 rigs though it remains well below 2014 highs of 1069.

This is still a notable change in stance, and comes ahead of the Saudi Aramco IPO, likely next year. OPEC scrapped its production ceiling last Dec.”