With oil prices deep in bear market territory on oversupply worries, a production cut at OPEC’s December 6 meeting in Vienna could be the key ingredient for bulls.
It may seem like common sense to cut production, but analysts point to reasons behind both ends of this binary decision.
The list of arguments for cutting production is obvious. Less supply should give a lift to prices. After all, Saudi Arabia and the United States are producing record amounts of oil.
“On our estimates, OPEC-ex-Iran would need to cut production by just 0.2 million-0.3 million barrels per day from the October 2018 level to balance the market across 2019,” wrote Morgan Stanley analysts in a note to clients. “Our call is that those production cuts will take place. That should lead to a balanced market in which inventories are stable.”
The balanced market should push Brent, the international benchmark for oil, to $70 a barrel in 2019, Morgan Stanley said. That’s a 15.5% rise from Monday’s level of $60.59.
West Texas Intermediate, the U.S. benchmark for crude, should rise to the low $60s if OPEC cuts production by one million barrels per day, according to Tamar Essner, energy director at Nasdaq IR Intelligence. WTI was trading under $52 a barrel on Monday.
Morgan Stanley sees the odds of a December production cut at two-thirds. That leaves a one-third chance of OPEC leaving things as is.
No production cut
The argument against the production cut surrounds OPEC’s market share. Less production from OPEC gives rivals more runway to increase their market share.
“In the past, the focus was on maximizing oil’s price,” Essner said. “Now it’s maximizing market share — [U.S.] shale represents an immediate alternative source of supply to OPEC.”
During the oil slump in late 2014, OPEC failed to cut production for fear of losing market share to rival producers. The cartel eventually agreed to production cuts in November 2016, which sent Brent prices to $67 one year later, from $45.
Keeping prices low also hurts U.S. producers, which bolsters OPEC’s prospects for maintaining its grip on production.
“WTI had to fall to $30-40 per barrel to drive [U.S.] shale production into decline,” Morgan Stanley analysts wrote, referring to the oil slump in 2016. “It is unlikely OPEC will want to test that again.”
The other factor weighing on OPEC’s decision is political. President Trump has tweeted support for low oil prices in recent weeks.
“That might make it more difficult for [OPEC] to cut production,” Essner said.
Scott Gamm is a reporter at Yahoo Finance. Follow him on Twitter @ScottGamm.
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