Despite the fact that the OPEC has already issued in significant supply cuts, this has been more than offset by the growing oil output of the U.S. in its booming Permian basin. Now it appears that more cuts might be looming on the horizon, as OPEC and its allies are expected to discuss further production cuts in their meeting in Vienna.
Specifically, Saudi Arabia is pushing the cartel to do more to make sure oil prices stay at a reasonable level, as reported by The Financial Times. The countries are coming together later this week to meet in Austria’s capital, where it is rumored that OPEC is considering cutting output by a further 400,000 barrels per day. The existing deal between the cartel has cut supplies of 1.2 million barrels per day expires sometime in March, and a new deal would extend the supply cuts up to 1.6 million barrels per day for the rest of 2020.
In response to this news, prices for oil ended up jumping significantly. International benchmark Brent crude rose by 4 percent on Wednesday, reaching $63 per barrel, while U.S. benchmark West Texas Intermediate ended the day around $58 per barrel.
Industry analysts have warned that the crude market could quickly become over saturated and oversupplied in the first half of 2020, not only due to America’s growing output but because the ongoing U.S.-China trade war can end up hurting demand if the global economic growth slows down.
“There’s increasing recognition in the group that they need to take action to support the market in the first half of next year,” commented Jamie Webster, an industry expert at Columbia University’s Center on Global Energy Policy. “But this is more of a defensive action designed to prop up the price above $60 a barrel.”
However, some analysts have argued that the end result of this new, updated agreement might not be as significant. Saudi Arabia has already been operating below its production target, even before the major attack on its oil facilities back in September which sent oil prices surging. At the same time, OPEC could decide just to continue its existing deal of cutting 1.2 million barrels per day and leaving it at that.
Other topics expected to be covered at the OPEC meeting include encouraging allied members to stick up to their side of the deal. In particular, both Iraq and Russia have increased their output above target levels from time to time, but not enough to significantly impact the global markets.
Oil prices also shot up on Wednesday for other reasons as well. U.S. crude inventories had also fallen more than originally expected, with stockpiles dropping down by 4.9 million barrels last week according to the Energy Information Administration. This was a significant increase from the 1.9 million-barrel decline expected by the market. Gasoline supplies have gone up by 3.4 million barrels, double the market’s expectations, while distillate inventories increased by 3.4 million barrels as well, almost tripling industry expectations as well.
Until the end of the week, investors are likely to stay on the sidelines and see what develops from this OPEC meeting.