OPEC and Allied Countries Extend Oil Production by One Month Nearly 10 Million Barrels a Day


OPEC and allied countries agreed on Saturday to extend a reduction in production of nearly 10 million barrels of oil per day until the end of July, in hopes of encouraging stability in the energy markets hard hit by the global economic crisis resulting from the coronavirus pandemic.

Cartel ministers and foreign ministers led by Russia met by videoconference to adopt the measure, aimed at reducing excess production by lowering prices, as global aviation remains largely entrenched due to the pandemic. Reduced production accounts for some 10% of the world’s total supply.

But the danger continues to hang over the market, since compliance with the production agreement remains fragmented, while a number of countries are lifting the trade barriers imposed to fight the pandemic.
Algerian oil minister Mohamed Arkab, the current president of OPEC, warned participants that the world’s oil inventory will reach 1.5 billion barrels by the middle of the year. “Despite the progress made to date, we cannot afford to rest on our laurels,” said Arkab. “The challenges we face remain daunting. ” It was a message picked up by Saudi Minister of Petroleum Abdulaziz bin Salman, who admitted “that we have all made sacrifices to get to where we are today”. He said he remained shocked by the day of April when the price of American oil fell below zero. Russian Energy Minister Alexander Novak also called April the “worst month in history” for the world oil market.
Energy Secretary Dan Brouillette tweeted his applause for the extension on Saturday, which he said came “at a pivotal moment as demand for oil continues to rebound and economies reopen in the whole world “.
The decision was taken unanimously, Energy Minister Suhail al-Mazrouei of the United Arab Emirates wrote on Twitter. He called it “a courageous decision”.
But this is only a one-month extension of a drop in output that was deep enough “to keep prices from falling so low that it creates global financial risk but not enough to make prices very high.” , which would be a burden on consumers during a recession, “said Amy Myers Jaffe, researcher at the Council for Foreign Relations.
“There is so much uncertainty that I think they have taken a conservative approach,” she said. “You don’t know how much production will resume. You don’t know what’s going to happen with the request. You don’t know if there is going to be a second wave (pandemic). “
Analysts only expected a one-month extension given the ever-changing level of demand.
“If demand is high, countries like Russia will want to produce more oil, so they probably won’t want to be locked into a longer-term deal that might not help them,” said Jacques Rousseau, CEO of Clearview Energy Partners. .
OPEC + had originally agreed in April that it would cut supplies by 9.7 million barrels per day (b / d) in May-June to support prices that have plummeted due to the coronavirus crisis. These cuts were to be reduced to 7.7 million b / d from July to December.
“The agreements went as planned,” Iranian Oil Minister Bijan Zanganeh told the Shana news agency after OPEC approved the extension of the agreement until July during a videoconference, according to Reuters. “The main problem was the non-compliance by members like Iraq with production reduction quotas, and it was decided that they would compensate for this in the coming months,” he said.
In a statement posted on the OPEC website on Saturday, Iraqi Oil Ministry spokesman Assem Jihad said that “despite the economic and financial circumstances facing Iraq, the country remains committed to the agreement ”.
A Bloomberg survey released on June 1, however, determined that Iraq had met its announced 42% drop in production in May. In total, OPEC reduced production from 5.84 million barrels per day to 24.6 million barrels per day last month, the lowest since 2002, for a compliance rate of 77%, according to the investigation.
Prior to the talks, OPEC sources said that Riyadh was considering an extension until August or even December.
Saudi Arabia, de facto leader of OPEC, and Russia must carry out a balancing exercise by raising oil prices to meet their budgetary needs while not pushing them well above $ 50 a barrel to avoid encouraging a resurgence of rival American shale production.
“In a refreshing change to OPEC’s decision, it looks like we already have a draft deal,” said Bjornar Tonhaugen of Rystad Energy in an email on Saturday.
“Such an agreement, with increased monthly monitoring by the JMMC committee, will mark the continuation of fundamental support for oil prices for the months to come,” he said.
Oil made a huge comeback from the historic drop in US reference prices to negative price territory in May, with the recovery largely due to the Organization of Petroleum Exporting Countries’ production reduction agreement and its allies, and unintentional reductions in production in the United States
The price rebound is “a positive development for the market and a signal that we have probably gone through the worst of the underlying imbalance” in the oil market, said Greg Liebl, senior investment strategist at Parametric Portfolio Associates.

have more than doubled since the negative forward settlement of $ 37.63 per barrel on April 20. At $ 39.55 a barrel on Friday, however, they were more than 35% lower to date. Prices rose on Friday as optimistic US job data for the month of May fueled expectations for a renewed pick-up in energy demand.
Liebl says it is important to remember that despite the May hike, the WTI is still lower than in early March, just before Saudi Arabia and Russia canceled their deal to cut production. Prices hovered around $ 46 the day before the deal was announced.
“The majority of companies in the industry do not make money at these low prices, and even Russia and Saudi Arabia [Arabia] need oil above $ 55 a barrel to balance their budgets, “said Alissa Corcoran, analyst and director of research at Kopernik Global Investors. “These low prices were not viable for a significant period of time, which offered us very attractive buying opportunities. “
However, OPEC +’s decision to extend the production cuts could result in an excessive tightening of supplies before the end of the year, said Leigh Goehring, managing partner of investment firm Goehring & Rozencwajg. “Postponing OPEC production cuts will lead to a serious deficit in the world oil market in the fourth quarter. “
In the United States, shale production in the United States could experience a “huge decline” from the third quarter. Combined with a continued rebound in demand, this would cause “huge inventory declines” by the middle of the third quarter that would accelerate in the fourth quarter.
However, higher prices could eventually lead to higher shale production, and the path to demand remains uncertain.
“There is a risk that North American shale production will increase, responding to a partial recovery in crude prices, while the recovery in oil demand should slow down by September … in the weaker seasonal period”, says Chris Midgley, Global Analytics Manager at S&P Global Platts.
“There is also the risk of secondary waves of [Covid-19] infection, which poses a significant risk to oil demand “and prices, he adds.


Please enter your comment!
Please enter your name here