OPEC Help Market Find a Floor

Following two days of meetings in Vienna, OPEC+ have agreed a production cut of 1.2mn b/d from January 2019, based on a 2.5% reduction from the October baseline for all members aside from Kuwait, who will cut from September’ s baseline . Given November’s elevated production levels (~11 .0 mn b/d for Saudi, 3.35mn b/d for the UAE), using October as a baseline gives a steeper cut than first assumed. Indeed, Khalid Al- Falih , the Saudi energy minister stated that Saudi’s production will likely fall to 10.2mn b/d in January. This would take Saudi’s cut from 0.27mn b/d (a 2.5% reduction from 10.7mn b/d) to 0.80mn b/d (11.0mn b/d in November to 10.2mn b/d in January). The decision to cut production was also important in reaffirming Saudi’s independence in pursuing oil production policy. Following domestic and international pressure in the aftermath of the Jamal Kashoggi incident, Saudi’s seeming reliance on the support of US President Donald Trump (a strong advocate of lower oil prices) led to some questioning the ability to cut. We expect OPEC’s firm decision to put a firm floor under prices and arrest a multi-month decline. We remain constructive on the balance for next year, although acknowledge there are numerous concerns regarding the health of the market, primarily: Concerns over the health of the global economy and implications for consumption growth . The continued expansion of US shale production, which looks set to record above-consensus growth of 2.0mn b/d this year. These concerns will keep a lid on prices through 1H19 , although we anticipate a comparatively strong 1Q19 as Saudi Arabia’s strong cut impresses the market. We expect the main price action will be consigned to 2H19, when the full effect of OPEC’s cuts will become apparent. We will release an update detailing the full effect on our balances next week