IEEJ：December 2019○ｃIEEJ 2019
Special Bulletin
A Japanese Perspective on the International Energy Landscape (458)

December 10, 2019

OPEC-plus Group to Deepen Joint Production Cuts from January 2020
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanOn December 6, the Organization of the Petroleum Exporting Countries and some
non-OPEC oil-producing countries including Russia held their ministerial meeting at OPEC
headquarters in Vienna and decided to expand their joint production cuts by 0.5 million barrels per
day from the current 1.2 million bpd to 1.7 million bpd from January 2020. The OPEC-plus group’sproduction cuts are based on its Declaration of Cooperation released in December 2016. The
ministerial OPEC-plus meeting was the seventh of its kind.
In a run-up to the meeting, oil market participants paid attention to whether theOPEC-plus group would maintain the current joint production cuts of 1.2 million bpd from theOctober 2018 level in view of the international oil market and crude oil prices from 2020 andwhether and how it would enhance the production cuts. Eventually, the OPEC-plus group chose toexpand the production cuts to 1.7 million bpd to support crude oil prices or exert upward pressure
on them, as mentioned above. In addition, as specified in a press release for the meeting, someOPEC-plus group members including Saudi Arabia offered to further deepen their production cutsin a voluntary manner, leading to 2.1 million bpd in total production cuts.
Crude oil prices responded to the OPEC-plus decision to expand the joint production cutsand the voluntary cuts that were expected to substantially raise the overall production cuts. InLondon on December 6, the key Brent futures contract gained $1.00 per barrel to $64.39/bbl. In New
York, the front-month West Texas Intermediate contract increased by $0.77/bbl to $59.20/bbl. For
the first time in almost three months since September, Brent rose back above $64/bbl and WTI
above $59/bbl. On the next trading day of December 9, they fell back slightly but remained above
these respective levels. Some oil market participants predict that the enhanced production cuts would
lead the supply-demand balance to further tighten from 2020.
The OPEC-plus decision to substantially expand the production cuts came as news to me.
Just before the decision, my talks with stakeholders in oil producing countries led me to believe thatwhile it would be necessary for the OPEC-plus group to deepen the production cuts from theviewpoint of the supply-demand balance, I was uncertain about such decision because of somefactors to be checked. It was apparent that the supply-demand balance required the production cuts
to be enhanced. This was because production in non-OPEC oil-producing countries such as theUnited States in 2020 was expected to expand by more than 2 million bpd against an increase of 1.2
million bpd in global oil demand estimated in line with a global economic growth rate of 3.4%
forecast in the International Monetary Fund’s world economic outlook.
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Crude oil prices had remained capped by uncertainties about the future course of theU.S.-China trade war and lingering global economic slowdown risks. As noted in “A Japanese
Perspective on the International Energy Landscape (454),” crude oil prices had been range-bound,though rising moderately. The key Brent futures price had failed to go beyond a $60-63/bbl range.
Market participants might have been conscious of potential oversupply from 2020. Amid suchmarket trend, speculation about a looser supply-demand balance next year, if growing, had been
expected to exert downward pressure on oil prices before the turn of the year. The OPEC-plus
decision to enhance the joint production cuts might have been designed to preemptively counter thepotential downward pressure to support crude oil prices and create momentum for oil price hikes.
Most OPEC and other oil-producing countries structurally depend on oil revenues and arevulnerable to crude oil price falls leading to serious economic problems. Even though their oilproduction costs are at the world’s lowest levels, these countries are required to keep crude oil prices
at very high levels to support their massive fiscal spending and keep a budget equilibrium. Current
oil price levels are estimated to lead to budget deficits. In this sense, oil-producing countries areurgently required to support crude oil prices. Furthermore, OPEC leader Saudi Arabia, which took
leadership in coordinating the enhanced joint production cuts, had a special reason for supporting
crude oil prices ahead of its state-run Saudi Aramco’s initial public offering, as noted by someanalysts.
Saudi Aramco’s IPO in Saudi Arabia is planned for December 11. On December 5, the oil
kingdom announced an IPO price at 32 riyals per share, indicating an IPO size of $25.6 billion.
Crude oil prices are undoubtedly the most important among factors influencing the IPO. In this sense,Saudi Arabia had apparently hoped to avoid any crude oil price decline and create momentum for oil
price hikes. Not a small number of market participants believe that the Saudi hope was a factor
behind the OPEC-plus decision to deepen the joint production cuts and some group members’
voluntary additional production reduction offers.
However, crude oil prices exert influence not only on oil-producing countries but also on
the world economy and the international situation. Particularly, sharp crude oil price hikes could
affect the U.S. social situation through gasoline price increases and would be a serious problem for
the United States and its President Donald Trump ahead of the next presidential election in 2020.
Every time when the OPEC-plus group decided to cut production, President Trump sent a Twitter
message to check such decision.
Saudi Arabia views its relations with the United States, particularly President Trump, as
important and gives sufficient consideration to the enhancement of the joint production cuts and theconsequent oil price hikes. Given this point and Saudi Arabia’s role in coordinating the latest
OPEC-plus decision, the need for supporting crude oil prices was very important for Saudi Arabia.
Given its important relations with the United States and President Trump, Saudi Arabia may berequired to adequately and flexibly implement policies and strategies while closely watching thefuture oil price trend.
The enhanced OPEC-plus joint production cuts would provide a new environment for theinternational oil market and crude oil prices in 2020. For the immediate future, crude oil prices will2

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remain supported by the enhanced joint production cuts. However, we will have to pay attention toprogress in the U.S.-China trade talks, the planned round of additional U.S. tariffs on Chinese
imports on December 15 and its potential impact, the future course of the European economy, global
economic slowdown risks and U.S. shale oil production expansion. The future course of the Middle
East situation including Iran, geopolitical risks and potential oil supply disruptions will also be key
factors worthy of attention. We will be required to keep close watch on the future international oilsituation and oil prices.

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