Rumors of OPEC Production Cuts

Chris Lewis
Chris Lewis

22 October 2019

3 min read

OPEC flag

  • Fears of weak demand in 2020
  • If OPEC cut production, would anybody care?
  • Weak demand can offset production cuts

OPEC is rumored to be looking at potential production cuts in December at the next meeting, as there is weak demand forecasted for 2020. However, the reality is that weak demand is a much bigger problem than supply. OPEC is decidedly weaker than it used to be, as the United States has become the world’s largest producer of crude oil. With that being the case, the question now is whether or not OPEC can significantly influence the markets.

The initial reaction

The original reaction was positive for the price of crude oil, but at the end of the day, it won’t be sustainable unless there is a slowing of storage input. That is a major problem for OPEC as the United States continues to pump out more oil every year, with no signs of slowing down. In fact, one of the biggest problems OPEC has is that there is an oil field in Alaska on federally protected land with more oil than Saudi Arabia and Iraq combined. In other words, if things were to ever get ugly enough, the Americans could take care of themselves.

If OPEC were to cut production, would anybody care?

This begs the question, if OPEC were to cut production, would anybody care? This is going to be a difficult question to ask, and it will certainly play out over the next six months if this does turn out to be true. Remember, for decades OPEC has had a stranglehold on the markets, and for the first time we are starting to see that grip on market pricing slip. If that’s going to be the case, then it’s very unlikely that this will have a long-term effect. At best, you could be looking at stabilization.

Longer-term outlook

The oil markets have been consolidating in a larger area recently, measuring roughly $10 per barrel. This is true for all grades of crude oil that are traded heavily, and therefore it’s probably the lens that the markets will be looking through.

For example, the WTI Crude Oil market has been trading between $50 on the bottom and $60 on the top. The Brent markets have seen similar action between $55 on the bottom and $60 on the top.

This could be setting up for a quiet and range-driven marketplace for the next year. It will come down to what kind of output cuts OPEC is suggesting, although it’s worth remembering OPEC’s history of cheating on those cuts anyway. Most of the countries involved in OPEC are highly dependent on crude oil, so cutting production too much causes major issues for these economies.

Much like a portfolio, diversification would do a lot for several countries involved at this point. Although we could get a short-term push higher, in the end it’s very likely that this will be yet another blip on the radar when it comes to crude oil.

Chris Lewis
Written By
Chris Lewis

Proprietary trader of currencies and futures, Chris has been a financial markets writer since 2008 and has helped traders globally in his role as educator. Father of two Chris enjoys baseball and building trading strategies.

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