OPEC takes the priliminary steps to cut the production of Oil in December to protect Oil Price fall
This is the first time in history which OPEC is active in Oil price change by reducing production policy. This means that when there is a huge oversupply in the market, OPEC will quit production to balance oil prices.
Previously OPEC normally used to take a passive approach to production policy and its impact on Oil Price, but now this strategy come to an end soon. OPEC is likely to take an action to cut production at this December meeting. Citigroup believes that OPEC may need to cut production by 500,000 drums a day to offset the glut.
Having the worse view for 2020, is that the only thing OPEC can do to prevent further falls in oil prices is to start to decrease production amount.
From the daily chart, if US crude oil falls below $50-51 in a short period or decrease further to $48. It is worth noting that there has been a marked tightening of international crude oil supplies recently, because of attacks on Saudi oil fields and US sanctions against Iran and Venezuela. But even so, it is not enough to offset further tightening of demand in 2020, so OPEC still is intended to cut production capacities.
OPEC is intended to break its tradition and manipulate proactive production cuts at this December meeting.
In 2018 December meeting, OPEC decided to reduce its production by 1.2 million barrels a day starting from 2019, while at its July meeting, the organization extended the deadline to March 2020. Considering that there will be a new surplus in 2020, the OPEC has anticipated a surplus of 200,000 barrels a day at current production levels. Based on this data, Morgan Stanley and Bundesbank anticipate that OPEC will propose production cuts in December.
Global market supply appears to have been tightened in recent months, shortening the need for production cuts in the short period. But if OPEC announces future production cuts, it will break OPEC's tradition, because OPEC normally cuts production only if there is a dramatic oversupply in the market.
This is an emerging strategy of OPEC, cause it is normally passive rather than active in the formulation of production reduction policies.
But continued weakness in oil prices may push OPEC to change its habits. Brent crude oil prices have fallen by about 20 per cent in six months, below the level needed for most OPEC countries to break even.
With uncertainty in the economic horizon, crude oil stocks will continue to increase.
According to the International Energy Agency, OPEC consists of 24 member countries, who produce half of the world's crude oil. Regarding that the global economy is reflecting its weakest economic growth during this decade, while the international trade situation is further damaging demand, coupled with the continued increase in production in non-OPEC oil-producing countries led by the United States, the IEA believes that this may leave the global market with an overproduction of 1.2 million barrels per day in the first six months of 2020.
Although Saudi oil production fell by 5.7 million barrels a day as a result of the attack on Saudi oil fields on September 14th, which caused cutting Saudi oil production to below 8.7 million barrels a day for a short period of time, and OPEC production compliance rose to more than 200 per cent, oil prices have now lost all their gains as Saudi production recovers.
Analysts say that although the Saudi oil field attack has caused a short supply shortage in the oil market, the market appears to have clearly digested the impact of short-term factors, so oil prices continue to fall.
OPEC officials have said that they are prepared to take this action. OPEC Secretary General Barkin has previously said that the organization will do its utmost efforts to prevent oil prices from reduction, and that member states are willing to consider all the potential options offered. Saudi Energy Minister Aziz also said his main job will be to check the surplus in the market.
For the first time in history OPEC may take the initiative to cut production in December to protect oil prices, If it is not as strong as expected, Oil Price may fall to $48.
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