If Opec thinks it has done its job with output cuts, 2019 will be a shock

If the group doesn't alter its current track, global oil stockpiles are set to rise by around 1.8 mn barrels a day in the first quarter of 2019 and to continue building throughout the year

It was meant to be a short, sharp shock. Instead, Opec members are facing a long, slow grind with no end in sight. 

The deal reached with several non-Opec countries in 2016 to cut oil supply and drain excess inventories was meant to last just six months. But after last week's ugly slide into a bear market for prices, the agreement looks likely to drag into a third year as the group faces having to make further cuts in 2019.

Taking 1.8 million barrels a day of oil off the market from January 2017 was meant to drain excess inventories by the middle of that year, restore prices to an undefined "acceptable" level and balance supply and demand. Instead, the glut persisted. Although better than expected, compliance with the agreement was not complete and it was not until the deal was extended and Saudi Arabia started cutting shipments to the US in the middle of 2017 that prices really began to pick up.

A further extension to the deal helped to push prices up to $80 a barrel by mid-2018, earning tweeted rebukes from President Donald Trump that prompted a relaxation of the cuts and a surge in supply from those with the capacity to do so -- principally Saudi Arabia and Russia. Total Opec output is now the highest since before the cuts were introduced, even after allowing for changes in membership, while Russia's hit a post-Soviet high of 11.4 million barrels a day last month.

But the recovery in oil prices has been a double-edged sword for Opec and friends. Sure, it has boosted revenues for most -- Venezuela and soon Iran being the exceptions -- but it has also lit a fire under US shale oil production. 

The latest weekly and monthly data both show American oil output up by 2 million barrels a day year on year. That's equivalent to adding the combined production of Opec members Nigeria and Gabon in the space of 12 months. And it comes at a time when shale growth is being hampered by a lack of pipeline capacity to move crude from the Permian Basin in Texas to the refining and export facilities on the Gulf of Mexico. Those bottlenecks should ease next year, allowing supply to rise by another million barrels a day by the end of 2019, according to the Energy Information Administration. On past performance, that forecast could increase significantly.

Perversely, renewed US sanctions on Iran, which came into effect on November 5, have added to the perception of a growing supply glut. The country's exports have fallen by almost 40 per cent since April, the last month before President Trump announced that he was pulling the US out of the nuclear deal. But unexpectedly generous waivers from sanctions, which were extended to several countries that had already halted purchases, have raised the possibility that Iran's overseas oil sales could actually increase in November.

Oil ministers from the Opec+ group that cut output are meeting today in Abu Dhabi to assess their ongoing collaboration. The get-together won't set policy, that will have to wait until the full meetings in Vienna in early December, but it will set the tone for those gatherings. There is already talk between Saudi Arabia and Russia of a need to extend restraint into 2019 and both may consider reducing their own output back to their individual target levels, having boosted it in recent months to make up some of the shortfalls from Venezuela and Iran.

Opec's own analysis shows the need to prolong, or even deepen, the cuts. If the group doesn't alter its current track, global oil stockpiles are set to rise by around 1.8 million barrels a day in the first quarter of 2019 and to continue building throughout the year. 

Producers may get a short respite from falling prices in the next few weeks. Demand from US refineries could rise by as much as 1.5 million barrels a day by the end of the year, as plants return from their normal fall maintenance. But that boost will be short-lived. 2019 is looking like another difficult year for Opec and friends.