OPEC is trying to bolster oil prices but Gulf economies will take a hit from a production cut.
OPEC and other oil producers have initiated output cuts as part of a deal hammered out last month to counter a supply glut and low prices. The agreement, which came into effect January 1, has the cartel and non-OPEC members slashing production from October levels: OPEC members are cutting output by 0.8 million barrels per day (bpd), and non-OPEC suppliers by 0.4 million bpd. It will continue for six months.
The cuts should bolster prices in the medium term, says Ann-Louise Hittle, vice president, Oils Research, at Wood Mackenzie: “A production cut of 1.2 million bpd would tighten the oil market by the third quarter of 2019 and cause prices to rise back above $70 per barrel for Brent crude.”
The pact, reminiscent of the first OPEC/non-OPEC production cuts in December 2016, was announced against the backdrop of a larger geopolitical realignment. Despite calls by US President Donald Trump for OPEC to maintain output, lead producer Saudi Arabia signaled it will not automatically toe Washington’s line. Riyadh persuaded Russia, a non-OPEC member, to go along with production cuts, demonstrating Crown Prince Mohammed bin Salman’s desire for an insurance policy against Trump’s “America First” strategy. Trump irked Saudi Arabia by granting waivers on US sanctions to eight countries to continue imports of Iranian crude.
Meanwhile, Qatar quit membership of OPEC, ostensibly to focus on developing its massive liquefied natural gas fields. Yet this, too, is regional politics. The tiny Gulf emirate has been locked in a bitter dispute with Saudi Arabia, the UAE, Bahrain and Egypt since 2017 over alleged links to terrorist organizations and its friendly relationship with Iran.
The decision to curtail oil production is going to hit Gulf economies hard. London-based Capital Economics predicts the OPEC deal will cause a more severe slowdown than predicted. It forecasts an end-2019 price of $60 for Brent and has revised down GDP forecasts for the regional bellwether economies, Saudi Arabia and the UAE, to 1.3% and 3.5%, respectively, down from 4.3% for both economies.