Market Perspectives

OPEC country flags

OPEC output cut may offer positives for oil market

12.18.2018

The Organization of Petroleum Exporting Countries (OPEC) on Dec. 7, 2018, announced it would cut crude oil production by 1.2 million barrels per day (bpd), with 800,000 from OPEC members and 400,000 from non-OPEC partners. The reduction will take effect Jan. 1, 2019, and will be reevaluated at the end of April 2019, which also is when the Iran export exemptions expire.

OPEC MEMBERS
Algeria
Angola
Congo
Ecuador
Equatorial Guinea
Gabon
Iran
Iraq
Kuwait
Libya
Nigeria
Qatar
Saudi Arabia
United Arab Emirates
Venezuela

OPEC’s decision on a production cut was a slightly better outcome than the market had expected from this meeting and crude oil prices rose about 5% on the news.

OPEC has not released a breakdown by country of the 800,000 bpd reduction by member states. However, we think the bulk of the cut is likely to come from Saudi Arabia. Russia is expected to represent at least half of the 400,000 bpd reduction from non-OPEC partners. Iran, Venezuela and Libya are exempt from the agreement and are not required to cut their oil output.

By being vague with the details, OPEC has allowed some flexibility in how the production cuts will be executed.

For instance, if Iran oil exports continue to fall because of the sanctions imposed by the U.S. or Venezuela continues its downward spiral in output, those reductions theoretically could be included in the total 800,000 bpd cut.

It also is not clear which countries in addition to Russia will be included in the non-OPEC reduction of 400,000 bpd. Canada recently announced that it would implement a mandatory reduction in oil production because of pipeline constraints. OPEC did not specify whether this action was included in the non- OPEC total.

Ivy View: A Positive Step

The bottom line for us is that OPEC has taken a positive step toward rebalancing the world oil market and we think the move will be supportive for prices.

We would note, however, that the unknown aspects of the announcement still could nudge the market toward a more bullish or bearish outcome. In addition, effective implementation of the production cuts will be a key factor in determining how sustainable any potential oil price rally may be.

Oil prices have taken a winding path during volatile market year
Chart Showing Oil prices have taken a winding path during volatile market year
Chart Showing The Oil prices have taken a winding path during volatile market year

 

We think OPEC’s decision also gives U.S. exploration & production companies (E&Ps) the “all-clear” to continue maximizing oil production and taking market share, providing they have the cash flow.

We believe there will be less of a reduction in U.S. spending activity than is factored into stock prices and there even may be a slight increase in 2019. In our view, this is likely to be positive for U.S. E&Ps, oil services and refining companies.

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key takeaways

  • OPEC on Dec. 7 announced it would cut crude oil production by 1.2 million barrels per day through April 2019.
  • We consider this a positive step toward rebalancing the world oil market and it is likely to support crude oil prices.
  • Final implementation of the output cuts will be a key factor in sustaining any potential oil price rally.

investment team

David P. Ginther, CPA

Senior Vice President, Portfolio Manager

Mr. Ginther is co-portfolio manager of the firm’s Energy investment strategy and has served as a portfolio manager of the strategy since 2006. He has been portfolio manager of the firm’s Natural Resources funds since 2013. He was portfolio manager of the firm’s Dividend Opportunities funds from 2003 to 2013. He joined the firm in 1995 as an equity investment analyst, covering industries in the energy, materials and utilities sectors.

Mr. Ginther had previously been a senior business analyst with Amoco Corporation. He began his career with Amoco in 1986. He experienced a variety of opportunities while at Amoco related to exploration and international financial reporting.

Mr. Ginther earned a BS in Accounting from Kansas State University and also earned a Certified Public Accountant designation.

Michael T. Wolverton, CFA

Vice President, Portfolio Manager

Mr. Wolverton is co-portfolio manager of the firm’s Energy and Natural Resources investment strategies, appointed to this role in 2016. He had served as assistant portfolio manager to the strategies since 2013. As an equity investment analyst, he covered energy equipment and services, and oil, gas and consumable fuels.

Prior to joining the organization in 2005 as an equity investment analyst, Mr. Wolverton held an intern position at the firm in summer 2004.

Mr. Wolverton earned an MBA with an emphasis in Finance from the University of Texas at Austin, McCombs School of Business and a BS in Accounting from William Jewell College.

investment STRATEGY 

The opinions expressed are those of the portfolio managers and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through December 2018, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon.