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OPEC cuts but duds to balance prices
* The 7th OPEC and non-OPEC Ministerial Meeting agreed an additional cut of 0.5mnbopd starting 1st Jan’20 on the 1.2mnbopd cut agreed in Dec’18.
* This leads to a total agreed cut of 1.7mnbopd. Also, a few countries, mainly Saudi Arabia, are likely to continue voluntary additional cuts, resulting in a total expected cut of ~2.1mnbopd (OPEC: 1.59mnbopd; non-OPEC: 0.51mnbopd).
* The additional cuts (of 0.9mnbopd) are in line with the expected call on OPEC crude, which is at 29mnbopd for 2020, down ~1mnbopd from the 2019 call at 30mnbopd.
* However, tepid demand has not resulted in any spike in crude oil prices amidst expected growth in US oil production and non-compliance of OPEC+.
Supply side caveats to stay…
* The aforementioned production cut (of 0.5mnbopd) is subject to full conformity by every country participating in the Declaration of Corporation (DoC).
* Even in the past, Saudi Arabia, the UAE and Kuwait complied, while others including Russia, Oman and Nigeria failed to attain 100% compliance.
* Additionally, domestic oil production from the US has touched an all-time high of ~12.2mnbopd in 3Q2019 (~9% up from ~11.2mnbopd in 3Q2018), with the EIA forecast standing at ~13.4mnbopd for 4Q2020.
* The forward Brent curve trades into backwardation, with 3M forward (Feb’20) at USD64.4/bbl and 12M (Dec’20) at USD59.5/bbl.
…while demand concerns remain
* Concerns about global economic growth and incremental oil demand prevail, with various downward revisions to the forecast built at the beginning of 2019.
* The IEA revised down its global economic growth forecast to 2.9% for 2019 (from 3.2%) and to 3.0% for 2020 (from 3.4%) during its OECD Interim Economic Outlook (in Sep’19).
* Reflecting on the lower global GDP outlook, the IEA also revised down its global oil demand forecast by 0.4/0.2mnbopd to 1.0/1.2mnbopd for 2019/20.
* OPEC has similar estimates of global economic growth of 3% and oil demand growth of 1.1mnbopd for 2020.
* In the absence of a global recovery, increasing trade concerns and rising domestic production from the US, we revise down our Brent oil price forecast for FY20/21 to USD65/bbl from USD70/bbl.
Valuation and view
We expect crude prices to remain
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