Oil rises amid optimism over OPEC supply cuts, hopes on U.S.-China trade


TOKYO (Reuters) – Oil prices gained on Friday after OPEC’s forecast for oil demand next year fueled hopes that the producer group and allies will maintain supply cuts when they meet to discuss policy on output next month.

FILE PHOTO: Oil pump jacks at sunset near Midland, Texas, U.S., August 21, 2019. REUTERS/Jessica Lutz/File Photo

Optimism that the United States and China may soon sign an agreement to end their trade war helped support prices after White House economic adviser Larry Kudlow said a deal was “getting close”, citing what he called very constructive discussions with Beijing.

Brent crude futures were up 19 cents, or 0.3%, at $62.47 a barrel by 0759 GMT, having dropped 9 cents on Thursday.

West Texas Intermediate crude was up 21 cents, or 0.4%, at $56.98 a barrel, after falling 0.6% in the previous session.

The rosy mood came after the Organization of the Petroleum Exporting Countries (OPEC) said on Thursday it expected demand for its oil to fall in 2020.

Many analysts said that supports the view among markets that there is a clear case for the group and other producers like Russia – collectively known as ‘OPEC+’ – to maintain limits on production that were introduced to cope with a supply glut.

But such a move may backfire, according to Jonathan Barratt, chief investment officer at Probis Group.

“There’s no reason to extend the cuts, we all know the economies are softening,” he said. “If you push prices higher it is going to hurt everyone and even if it doesn’t, it’s only going to play into the U.S. producers’ hands.”

OPEC+ on Jan. 1 this year cut output by 1.2 million barrels per day (bpd), and in July, renewed the pact until March 2020.

OPEC said demand for its crude would average 29.58 million bpd next year, 1.12 million bpd less than in 2019. That points to a 2020 surplus of about 70,000 bpd, which is less than indicated in previous reports.

The producer group will meet in Vienna next month.

In the United States, production keeps rising, and last week, there was a bigger-than-expected increase in U.S. stockpiles, something that would often lead investors to sell.

Crude production rose by 200,000 bpd to a weekly record of 12.8 million bpd, the EIA said in its weekly report. [EIA/S]

U.S. crude inventories grew last week by 2.2 million barrels, the Energy Information Administration said, exceeding the 1.649 million-barrel rise forecast by analysts in a Reuters poll. [EIA/S]

The U.S. shale industry plans another spending freeze next year and a sharp slowdown in production growth, as prolific oil and natural gas output has pressured prices and squeezed profits.

Reporting by Aaron Sheldrick; Editing by Kenneth Maxwell and Tom Hogue



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Rupee Declines Most in Asia as Moody’s Cuts India Rating Outlook By Bloomberg



(Bloomberg) — India’s rupee declined the most in Asia, while sovereign bonds and stocks saw modest losses after Moody’s Investors Services lowered the nation’s rating outlook to negative citing growth concerns.

The reduction comes at a time when investors have been skeptical about the government meeting its budget targets amid a slowdown in tax revenues and September’s surprise $20 billion tax giveaway for companies.

The rupee weakened 0.4% to 71.2525 per dollar as of 9:55 a.m in Mumbai after falling to 71.2750, the lowest since Oct. 18. The yield on benchmark 10-year bonds rose three basis points and the S&P index of shares fell 0.2%, halting its record-setting rally.

“It’s fair to say that the currency will face significant brunt from the news, giving away some of the recent strength and maybe more,” said Prakash Sakpal, economist at ING Groep (AS:) NV in Singapore. “I won’t be surprised if INR spikes back above 72 in coming days.”

Indian assets have got a boost in recent weeks from strong overseas inflows. That’s after better-than-expected earnings in the September quarter stoked optimism that companies have weathered the worst of an economic slowdown following a series of government stimulus measures and five back-to-back rate cuts so far this year.

Foreigners have bought stocks worth $501 million in November, after pumping in more than $2 billion in October, and have been buyers of sovereign debt for nine straight sessions. Twenty-four of the 38 Nifty 50 firms that have posted earnings so far this season have beaten or matched the average analyst estimate.

Going Strong

The Sensex is still on course to mark its fourth weekly climb in five. The gauge’s 14-day relative strength index reached 74 on Thursday, above the level of 70 that some investors read as a signal to sell.

Not everyone expects the change in outlook to raise overseas borrowing costs for local companies. Indian firms may raise another $20 billion via offshore debt in the six months through March after seeking $25 billion in the six months ended September, Care Ratings said in a note Thursday.

“I don’t expect it to lead to any significant rise in borrowing costs as Moody’s is currently rating India a notch higher than Fitch Ratings and S&P Global Ratings,” which still hold the nation’s outlook at stable, said Ajeet Choudhary, executive director for fixed income at J.P. Morgan Private Bank in Asia. “I expect minor correction of 5-10bps in spreads for India IG papers.”

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.





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Fed’s Daly says rate cuts put U.S. economy in better position By Reuters



(Reuters) – San Francisco Federal Reserve President Mary Daly said Monday that the central bank’s three rate cuts leave the U.S. economy better positioned to withstand the risks of global slowdown, joining the chorus of policymakers saying it is time to let the Fed’s insurance cuts take effect.

“The last three interest rate cuts that we made are to be supportive so we don’t find ourselves in a slowdown that translates into something else,” Daly said Monday at an event at New York University. “It’s about getting the economy in a good place… so that we can continue to push against the considerable headwinds against the U.S. economy.”

Daly also said the U.S. economy was strong and that officials would adjust monetary policy if economic data pointed to a more pessimistic outlook.

Fed officials lowered interest rates last week for the third time this year, bringing the target level to a range of 1.50% to 1.75%. The rate cut was accompanied with new language suggesting that officials were done with the current ‘mid-cycle’ round of rate reductions.

Daly does not vote on the Fed’s monetary policy decisions this year but she does participate in deliberations.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.



Gold Prices Gain Amid Sino-U.S. Trade Uncertainties; Fed Cuts Rate as Expected By Investing.com


© Reuters.

Investing.com – Gold drew some safe-haven demand on Thursday in Asia after Chile announced on Wednesday it had canceled a November meeting of the Asia Pacific Economic Cooperation council, which was supposed to provide the original venue for the signing of a partial trade deal between China and the U.S.

Chile also extended a state of emergency to several cities across the country as it grappled with nationwide protests sparked by a proposed hike in public transport fares.

for December delivery rose 0.2% to 1,499.95 by 1:33 AM ET (05:33 GMT).

Limiting the gains of the yellow metal werereports that Washington still planned to sign the deal with China in November despite the cancelation of the summit.

China’s cabinet adviser Zhu Guangyao told Reuters on the sidelines of a forum in Singapore on China-U.S. relations that he is still optimistic that a deal can be signed next month.

“Based on (the principles of) mutual trust and mutual benefits, I believe both countries can achieve great success,” said Zhu, who was directly involved in the bilateral trade talks as a vice finance minister until his retirement in 2018.

In other news, the U.S. Federal Reserve slashed its benchmark funds rate by 25 basis points to a range of 1.5% to 1.75%, as expected.

The central bank hinted that it may pause its future rate hike plans, as it removed a key clause in the post-meeting statement that said the Fed was committed to “act as appropriate to sustain the expansion.”

Fed Chair Jerome Powell said in a news conference that central bank officials “see the current stance of monetary policy as likely to remain appropriate.”

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.



Fed Cuts Rates by Quarter Point Amid Concerns About Global Economy, Trade By Investing.com


© Reuters.

Investing.com – The Federal Reserve cut interest rates by 25 basis points Wednesday, in what was a widely expected decision, amid persistent concerns over the sluggish pace of inflation and the slowdown in the global economy.

The Federal Open Market Committee cut its to a range of 1.5% to 1.75% from a previous range of 1.75% to 2.00%.

In the accompanying monetary policy statement, the Fed said economic activity had been rising at a “moderate” rate, though it pointed to “muted inflation pressures” as one the reasons for cutting rates.

The (PCE) index, the Fed’s preferred measure of inflation, has remained shy of the central bank’s 2% target.

The first reading of third-quarter U.S. GDP, released earlier Wednesday, showed that the pace of economic growth slowed in the third quarter from the second, as ongoing strength in the consumer was offset by a slowdown in business investment.

The Fed acknowledged the two opposing forces on economic growth, saying that “although household spending has been rising at a strong pace, business fixed investment and exports remain weak.”

It was the third rate cut in as many meetings, with the Fed sticking to its guidance that it would “act as appropriate” to keep economic growth alive.

But the Fed has been quick to rein in investor expectations that a prolonged period of easing may follow, characterizing the previous rate cuts – in July and September – as an insurance policy against downside risks to its outlook.

That has done little to appease its detractors, who believe the central bank should accelerate rate cuts, potentially into negative territory.

“The Fed doesn’t have a clue! We have unlimited potential, only held back by the Federal Reserve,” President Donald Trump wrote on Twitter Tuesday.

In the lead-up to the Fed meeting, Scotiabank Economics said that since the central bank’s last meeting in mid-September there’s “increased evidence of a synchronous deterioration in global growth prospects and continued uncertainty toward Brexit and trade policy developments with as yet nothing resolved.”

Looking ahead, the Fed continued to suggest that it would monitor incoming economic data to assess future monetary policy action.

Traders are expected to shift attention to Fed Chairman Jerome Powell’s at 2:30 PM ET (18:30 GMT) for more insight into the central bank’s thinking on monetary policy.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.



Argentine central bank cuts dollar purchase limit sharply as forex reserves tumble By Reuters



BUENOS AIRES (Reuters) – Argentina’s central bank announced early Monday morning it would sharply cut the amount of dollars individuals could buy, amid concerns over outflows of foreign exchange reserves accelerating after President Mauricio Macri was voted out of power on Sunday.

The bank said it would restrict dollar purchases to $200 per month via bank account and just $100 each month in cash, until December, a dramatic adjustment from the $10,000 restriction the bank imposed at the beginning of September along with other currency controls to stem a slide in the peso.

“Given the current degree of uncertainty, the board of the BCRA has decided to take a series of measures this Sunday that seek to preserve the reserves of the Central Bank,” the entity said in a statement.

Guido Sandleris, the central bank chief, will hold a press conference at 8:30 am (1130 GMT) to explain the details of the measures, it added.

Argentina’s Peronists earlier swept back into power on Sunday, ousting conservative Mauricio Macri in an election result that puts Latin America’s third biggest economy back under the control of a more leftist government after it was battered by economic crisis.

The country has been grappling with frenzied markets since an August primary election vote where Peronist candidate Alberto Fernandez – now president-elect – soundly beat Macri, sparking a sell-off of the local peso currency, bonds and equities.

The sharp peso slide prompted the Macri’s administration to roll out capital controls to protect the currency, including imposing caps on dollar purchases. Foreign reserves have nonetheless tumbled by over $20 billion since.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.





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Bond fund managers see risk Fed cuts rates to zero By Reuters



By David Randall

NEW YORK (Reuters) – Speculation the Federal Reserve will continue cutting interest rates well past its policy meeting next week is pushing some bond fund managers into assets ranging from short-term Treasury bills to half-paid off 15-year home mortgages.

They’re betting that short-term U.S. interest rates will once again return to near zero for the first time since the wake of the 2008 financial crisis.

The market is already pricing in a 93.5% chance the U.S. central bank cuts short-term interest rates by at least 0.25% at its October 30th policy meeting, according to CME Group’s FedWatch tool, continuing a rate-cutting cycle that began earlier this year and helped lead to bull markets in both bonds and equities.

The probability of such a cut was just 64.1% in late September.

Yet fund managers and analysts from firms including First Pacific Advisors, Columbia Threadneedle, and Brandywine Global say the market is still underpricing the possibility the Fed will continue cutting rates well into next year, essentially taking short-term interest rates back to where they were before the central bank began lifting rates in 2015.

“We think the Fed’s precautionary cuts continue and the market isn’t anticipating that scenario and is priced for a soft landing next year,” said Edward Al-Hussainy, senior interest rate and currency analyst at Columbia Threadneedle.

As a result, shorter duration Treasurys up to 2-year bills are becoming more attractive, as well as emerging market bonds that are priced in dollars, he said.

“We’re looking for opportunities to add in risk assets that are sensitive to U.S. rates,” he said, expecting gains will come more in the form of price appreciation than yields.

The Fed’s likely efforts to steepen the yield curve by continuing to cut rates past the market’s expectations will also make short duration high yield debt attractive, said Gary Herbert, head of global credit at Brandywine Global, an affiliate of Legg Mason with $75 billion in assets under management.

“There’s a higher probability of a recession than we thought at the beginning of this year, and the Fed may need to return more significantly to unorthodox monetary policy like quantitative easing,” he said, referring to the bond-buying program the Federal Reserve instituted as an emergency response to the financial crisis. “It’s not unthinkable to expect a recession in the next year, it’s one stupid tweet away.”

At the same time, Herbert is buying investment grade corporate bonds that mature in approximately 3 years. He is focusing on companies such as Boeing Co (N:) and General Electric Co (N:) that have strong balance sheets yet are struggling due to issues including a corporate turnaround and the grounding of the 737 MAX airliner.

“Even if they were to be downgraded, they would be able to tender that debt to create better liquidity,” keeping their strong balance sheets intact, he said.

Tom Atteberry, portfolio manager of the $7.3 billion FPA New Income fund, said negative bond yields in Europe and Japan are prompting more foreign investors to pick up U.S. debt, which will continue to push yields lower throughout the market.

He is finding opportunities in bonds backed by prime-rated auto leases, loans for equipment ranging from cell phones to service fleets, and 15-year mortgage pools that originated in 2012 and 2013, he said. Each category offers yields between 1.90% and 2.25%, compared with the 1.73% yield the benchmark 10-year Treasury offered Thursday, and should continue to do well if interest rates fall.

“You should have higher yields, but you’ve got two large economic blocs with negative yields and central bank interventions on an ongoing basis,” he said. “It’s almost an unnatural time.”



Ford cuts full-year profit outlook as third-quarter profit dips


DEARBORN, Mich. (Reuters) – Ford Motor Co (F.N) on Wednesday cut its forecast for operating profit for the year after a disappointing third quarter that Chief Executive Jim Hackett blamed on higher warranty costs, bigger discounts and weaker than expected performance in China.

FILE PHOTO: The Ford logo is seen at the North American International Auto Show in Detroit, Michigan, U.S., January 15, 2019. REUTERS/Brendan McDermid

Investors sold off Ford shares, which fell 2.5% to $8.98 in after-hours trading while shares in electric car maker Tesla Inc (TSLA.O) surged more than 20% on better than expected results.

In a conference call with analysts, Hackett said Ford “experienced more headwinds” than expected in the quarter.

“As a result, we will not grow adjusted EBIT this year as we intended,” Hackett said, referring to earnings before interest and taxes.

The disappointing financial results are a setback for Hackett, the former CEO of office furniture maker Steelcase, who took over Ford in May 2017 after the abrupt ouster of Ford veteran Mark Fields.

For two years, Hackett has been asking investors to be patient with a methodical restructuring that has made progress, including a wide-ranging alliance on electric vehicles with Volkswagen AG (VOWG_p.DE) and the sale of money-losing operations in India to a venture controlled by Indian automaker Mahindra & Mahindra (MAHN.NS).

But by Ford’s own reckoning, most of the restructuring work has yet to be done. It has booked only $3.3 billion of the projected $11 billion in charges it previously said it would take for the global restructuring, up from $2.2 billion at the end of the second quarter.

The company also suffered a bumpy introduction of the redesigned Ford Explorer and all-new Lincoln Aviator in the quarter, said Joe Hinrichs, Ford’s president of automotive.

“We were disappointed in the overall performance,” he told analysts, referring to the uneven vehicle launch and production ramp-up at an aging Chicago assembly plant.

“We took on too much,” said Hinrichs, citing the difficulty of launching the Explorer and Aviator simultaneously while it was breaking in a new assembly line at the 95-year-old Chicago plant. “We have plenty of inventory now at dealers,” he added.

The third quarter included $1.5 billion in costs for the company’s global restructuring, $800 million of which was related to the formation of a joint venture in India with Mahindra.

Ford’s ongoing restructuring includes cutting costs and overhauling its product lineup in key global markets like China and Europe.

The No. 2 U.S. automaker still faces the prospect of negotiating a new four-year labor agreement with the United Auto Workers following the union’s more than month-long strike against General Motors Co (GM.N), which cost GM about $2 billion according to analysts.

Ford reported a third-quarter net profit of $425 million, or 11 cents a share, compared with $991 million, or 25 cents a share, a year earlier.

Excluding one-time charges, Ford earned 34 cents a share, above the 26 cents analysts had expected according to IBES data from Refinitiv.

Revenue in the quarter fell 2% to $37 billion, above the $33.98 billion expected.

Virtually all of Ford’s third-quarter pretax profit came from North America – its most lucrative market – where highly profitable pickup trucks drive margins for the Dearborn, Michigan-based automaker and its Detroit rivals, GM and Fiat Chrysler Automobiles NV. (FCHA.MI)

Ford said Wednesday it now expects a full-year adjusted operating profit in the range of $6.5 billion to $7 billion, compared with $7 billion last year. In July, it had forecast an increase in the range of $7 billion to $7.5 billion.

Ford also said it expects adjusted earnings this year in the range of $1.20 to $1.32 a share. Previously, the high end of its forecast had been $1.35. Analysts expect $1.26 a share.

Ford’s third-quarter operating profit in North America was just over $2 billion. Its U.S. sales in the quarter fell 4.9%, but demand for lucrative pickups remained strong with an increase of almost 9%.

China revenue in the quarter slid about $300 million to $900 million and Ford’s share in that market fell to 2.3% from 2.9% last year.

Ford’s third-quarter sales in China fell 30% as it continued to lose ground in its second-biggest market. Ford has been struggling to revive sales in China since its business began slumping in late 2017.

In September, Moody’s downgraded Ford’s credit rating to junk status – below what it rates larger rival GM – citing Ford’s operating and market challenges, and weak cash generation due to its global restructuring.

Reporting by Ben Klayman and Paul Lienert in Dearborn; Editing by Matthew Lewis and Tom Brown



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Halliburton vows more cost cuts as shale demand dwindles, shares rise


(Reuters) – Halliburton Co on Monday promised more cost cuts after reporting a bigger-than-expected drop in quarterly revenue as the oilfield services looks to counter weak demand from North American shale producers, sending its shares up about 7%.

FILE PHOTO: Oil production equipment is seen in a Halliburton yard in Williston, North Dakota, U.S., April 30, 2016. REUTERS/Andrew Cullen/File Photo

The biggest hydraulic fracking services provider, which earlier this month cut 650 jobs in North America, said it would take steps over the next few quarters that will lead to $300 million in annualized cost savings.

Oilfield service providers are struggling with reduced spending by oil and gas producers as investors push for higher buybacks and dividends rather than growth in a weak oil price environment.

Larger rival Schlumberger NV said on Friday it had recorded a $1.58 billion goodwill impairment charge related to its pressure pumping business in North America.

“HAL is taking costs out more aggressively than the Street forecast, which it expects to lead to strong Q4 operating margin improvement in the Drilling & Evaluation segments despite falling revenue,” said Anish Kapadia, founder of London-based oil and gas consultancy firm AKap Energy.

Halliburton warned of further activity declines in North America, with fourth-quarter revenue for its hydraulic fracturing business declining by low double digits and margins by 125 basis points to 175 basis points.

“Feedback from our customers lead us to believe that the rig count and completions activity may be lower than the fourth quarter of last year,” Chief Executive Officer Jeff Miller told analysts during a post-earnings call.

Halliburton said its revenue from North America, which accounts for more than half of the company’s total, fell 21% in the third quarter. Revenue from completion and production fell 16% in the three months ended Sept. 30.

The company also idled more equipment in the third quarter than the first six months of the year, Miller said.

Evercore ISI analyst James West said Halliburton was “showing leadership by walking away from unprofitable or low return work.”

Net profit attributable to Halliburton fell to $295 million, or 34 cents per share, in the three months ended Sept. 30, from $435 million, or 50 cents per share, a year earlier.

Analysts had on average estimated 34 cents per share, according to Refinitiv IBES data.

Revenue fell to $5.55 billion, below analysts’ average estimate of $5.80 billion.

Halliburton’s shares were last up 5.9% at $19.52. The stock also pulled rivals higher, with Schlumberger gaining 2.4%.

Reporting by Shariq Khan and Taru Jain in Bengaluru; Editing by Sriraj Kalluvila



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OPEC’s Next Meeting May Unveil New Approach to Cuts By Bloomberg



(Bloomberg) — As the clamor grows for OPEC to slash even more oil production, and the cartel vows to consider any necessary action, its next meeting could result in an unusual step: a preemptive supply cut.

The Organization of Petroleum Exporting Countries and its partners — known as OPEC+ — have reduced output this year to contain a glut created by faltering oil demand and surging U.S. shale supply. Amid forecasts of a new surplus next year, there’s a chorus of calls from Morgan Stanley (NYSE:) to Commerzbank AG (DE:) for the alliance to deepen the curbs when it meets in Vienna in December.

But in recent months global markets have grown tighter, removing any immediate need to act. If extra cutbacks are announced, it would mark a break with tradition for the cartel, which typically waits for a glut to emerge before responding.

“It would break the mold,” said Derek Brower, a director at consultant RS Energy Group. “OPEC makes policy reactively, not proactively.”

Depressed oil prices may compel the group to change its habits. has slumped about 20% in six months to around $59 a barrel in London — below the levels most OPEC nations need to cover government spending — and on Friday headed for a weekly loss of 1.4%. A renewed sell-off in 2020 would squeeze revenues even further.

‘Daunting’ Stockpiles

OPEC+, a collective of 24 producers that pumps half the world’s oil, confronts a “daunting” surplus in the first six months of 2020 of about 1.2 million barrels a day, according to the International Energy Agency. Demand is being eroded by the weakest global growth in a decade and the U.S.-China trade war, while supplies are swelling in the U.S. and elsewhere. As a result, the group is facing a “serious challenge” to defend prices, said Neil Atkinson, the agency’s head of oil markets.

The coalition agreed to cut output by 1.2 million barrels a day this year, a reduction that has been compounded by a range of crises, from sanctions on Iran to a missile attack on Saudi Arabia’s oil-processing facilities. Nonetheless, traders and consultants from Gunvor Group Ltd. to Rystad Energy AS recommend a further cutback when OPEC+ meets on Dec. 5-6.

“If by December there are clear signs of economic weakness, then a further deepening by a minimum of 500,000 barrels a day would be highly likely,” said Ed Morse, head of commodity research at Citigroup Inc (NYSE:). in New York.

OPEC’s top officials have signaled they’re prepared to consider this. Secretary-General Mohammad Barkindo said the group will do “whatever it takes” to prevent a market slump and that members are willing to “put all options on the table.” Saudi Energy Minister Prince Abdulaziz bin Salman, who represents OPEC’s biggest member, said his job is to check a surplus.

Even Russia’s President Vladimir Putin, who leads OPEC’s most important, yet often reluctant ally, has said he recognizes the need for further cooperation.

Yet announcing a supply cut while the market is in deficit would be a departure for the organization.

When OPEC+ was established in late 2016, surplus inventories had ballooned to a record of more than 300 million barrels and were still accumulating at a rate of 1.4 million a day, according to the Paris-based IEA. Its current round of cuts was agreed in late 2018, when supply was exceeding demand by 2.7 million barrels a day.

Tardy Approach

In the past, OPEC has more typically been criticized for acting too slowly. When a surplus brews, members are reluctant to gamble that sacrificing sales volumes will be compensated by higher prices. There’s also the inevitable haggling over how much each nation should cut.

“It’s far easier for OPEC to sit on its hands, hope for the best, ignore gloomy forecasts for as long as possible and try to deal with any problems after they’ve emerged, rather than start the painful and tedious negotiations that are always needed before a new deal,” RS Energy’s Brower said.

The group can also be tardy in increasing production. OPEC’s inaction during the rally of early 2008 allowed oil prices to hit an all-time high above $147 a barrel, feeding into the global recession that sent crude tumbling later that year.

When OPEC assembles at its Austrian headquarters in December, global markets probably won’t be telegraphing any immediate surplus to be dealt with.

World oil inventories contracted in the third quarter by the most in a decade, falling by 228 million barrels, according to OPEC, as summer demand proved surprisingly robust and the group’s deliberate cutbacks were amplified by disruptions in Iran, Venezuela and Saudi Arabia.

Stockpiles are poised to shrink further in the fourth quarter, even if the kingdom has fully restored output from the Sept. 14 missile and drone strikes, the IEA estimates. Inventories may decline by about 55 million barrels.

Yet the outlook for the first six months of 2020 may nonetheless spur the producers into acting. The alliance needs to cut supply by 1 million barrels a day, and the only question now is the timing, said Bob McNally, president of Rapidan Energy Group and a former oil official at the White House under President George W. Bush.

“Normally it’s OPEC’s habit to wait until they can see the oversupply in the whites of the eyes,” McNally said. “But the heavily swollen balances for the first half of next year may push them to cut production earlier than planned.”