IEEJ：December 2018○ｃIEEJ 2018
Special Bulletin
A Japanese Perspective on the International Energy Landscape (406)

December 10, 2018

Vienna Group Oil Producers to Cut Production by 1.2 Million bpd from January
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanOn December 7, the Organization of the Petroleum Exporting Countries and some
non-OPEC oil producing countries including Russia (the so-called Vienna Group oil producers)
announced their agreement to cut their oil production by 1.2 million barrels per day – 0.8 million
bpd for OPEC and 0.4 million bpd for non-OPEC oil producers – from October 2018 level for sixmonths from January 2019. The announcement followed the 175th OPEC conference on December 6and the fifth Joint Ministerial Meeting of OPEC and non-OPEC oil producing countries on
December 7 in Vienna, reversing their June 2018 decision to effectively increase production only insix months.
Ahead of the meetings of oil producing countries, many oil market participants anticipateda decision to cut production. This was because prices plunged some 30% from their peaks in October
to $62.56 per barrel for Brent and $52.89/bbl for West Texas Intermediate on December 5 just before
the meetings. Brent rose above $80/bbl as growing geopolitical risks in the Middle East were
coupled with a prediction that the supply-demand balance would be tightened on a substantial fall in
Iranian crude oil exports under revived U.S. economic sanctions on Iran. Later, however, oil market
participants’ perception turned around. Oil inventories turned upward as a substantial increase in U.S.
oil production was combined with a production expansion by OPEC and Russia, leading supply toexceed demand. The United States exempted some major importers of Iranian oil from the sanctions
temporarily, allowing Iranian oil exports to be maintained for the immediate future. Furthermore,global economic risks grew on the escalation of the U.S.-China trade war. As a result of thesedevelopments, oversupply instead of undersupply became a matter of interest or concern to oilmarket participants.
Earlier, crude oil prices’ weakening from the second half of 2014 was prolonged, inflicting
hardship on oil producing countries that heavily depend on oil revenue for national economicmanagement. In a bid to escape from the hardship, they agreed to jointly reduce oil production,making progress in eliminating oversupply. In the second half of 2017, crude oil prices put an end totheir weakness. In 2018, they rose back above $70/bbl, relieving oil producing countries. However,recent rapid price drops and future supply and demand outlooks prompted oil producing countries torecognize that they should take measures against oversupply to stop oil prices’ further decline.
In addition to such market pressure, OPEC and its leader Saudi Arabia were exposed toanother pressure, which came from U.S. President Donald Trump’s message against any production
cut. For the United States, any excessively low oil price affects shale oil production, exerting anegative impact on the upstream oil and gas industry. From the viewpoint of the entire U.S. economy
and domestic politics, however, lower gasoline prices are significant for American citizens. Oil
producing countries’ joint production cut to push up crude oil and gasoline prices would not befavorable for President Trump. This was because President Trump frequently sent a message against
any OPEC production cut before the Vienna meetings.
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Any message from the president of the United States, the superpower playing a key role inmaintaining stability and security in the Middle East, is not insignificant to the leaders in the Middle
East. Particularly for Saudi Arabia that has had a “special relationship” with the United States andbeen concerned about the so-called “Khashoggi scandal” that has attracted global attention and could
invite harsh criticism against Riyadh, the message from President Trump, who is giving priority tomaintaining his country’s relationship with the current Saudi regime, was significant. Ahead of theVienna meetings, OPEC and its leader Saudi Arabia were sandwiched between the market pressure
and the Trump message.
As noted above, however, OPEC and other oil producing countries agreed to cut oil
production by 1.2 million bpd from January 2019. In this sense, they succumbed to the market
pressure. At the December 6 OPEC meeting, however, only a tentative production cut agreement
came without any cut being specified. Market participants took such accord as vague and a sign ofweaker oil prices, prompting crude oil futures prices to close lower on the day.
On the next day, however, OPEC and non-OPEC oil producing countries announced themore specific agreement to reduce oil production by 1.2 million bpd, leading the key futures price torise by $1.61/bbl to $61.67/bbl for Brent and by $1.12/bbl to $52.61/bbl for WTI. Unlike theprevious day’s vague tentative agreement, the broader accord on December 7 clarified the cut of 1.2
million bpd that was greater than the range of 0.8-1.0 million bpd as forecast by some market
participants, contributing to crude oil prices’ rebound. These oil producing countries successfully
averted the worst development in which they would have failed to reach any production cut orforged a vague agreement, inviting crude oil prices to plunge further.
While the worst development has been averted for the immediate future, however, twoquestions are still left pending for the future – (1) whether the agreement to reduce production by 1.2
million bpd would be fully implemented and (2) whether the production cut would be enough topush up crude oil prices. Regarding the first question, Russia, the largest crude oil producer among
the non-OPEC countries participating in the production cut agreement, has been steadily increasing
production and is expected to raise production further. In this sense, the extent to which Russia
would cut production would attract attention. On the other hand, Qatar seceded from OPEC inJanuary, with Iran, Libya and Nigeria left outside the joint production cut. Any actual production cut,including the extent to which OPEC leader Saudi Arabia would cover these countries’ share of theproduction cut, is still left uncertain.
The second question is also important. Many predictions say that the production cut of 1.2
million bpd would still leave supply to exceed demand in 2019. As a matter of course, any answer tothis question depends on various uncertain factors such as global economic trends including the oil
demand trend, the tempo of U.S. shale oil production expansion, Iranian crude oil exports after a180-day waiver on the imposition of the Iran oil sanctions, and geopolitical risks. At present, theanswer is difficult to make.
Reflecting these questions, crude oil prices’ rally after the announcement of the oil
production cut agreement was not so strong. For example, Brent rose to an intraday high of$63.73/bbl on December 7 before falling back to $61.67/bbl at the end of the day’s session. As
market participants fully consider the production cut agreement and try to find its impact on themarket, downward pressure may arise again depending on the supply-demand balance.
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In consideration of such uncertainties, OPEC and non-OPEC oil producing countries set
their next meeting for April rather than the usually selected month of June. They apparently intended
to clarify the need to reexamine market trends when the waiver on the Iran oil sanctions ends aroundthis timing. The future courses of the international oil market and crude oil prices are still uncertain
and should be carefully watched.

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