OPEC and its allies in the OPEC+ group have finalised a deal to cut production by 9.7 mmbbl per day
The deal is set to boost the oil price and provide some much-needed stability for an industry in crisis.
During the tenth meeting, producing countries reaffirmed the continued commitment of the participating producing countries in the ‘Declaration of Cooperation’ to a stable market, the mutual interest of producing nations, the efficient, economic and secure supply to consumers, and a fair return on invested capital.
Meeting participants emphasised the important and responsible decision to adjustment production at the ninth OPEC and non-OPEC Ministerial Meeting on 9-10 April.
In view of the current fundamentals and the consensus market perspectives, and in line with the decision taken at the ninth meeting, all participating countries agreed to adjust downwards their overall crude oil production by 9.7 mmbbl per day, starting on 1 May 2020, for an initial period of two months that concludes on 30 June 2020.
For the subsequent period of six months, from 1 July 2020 to 31 December 2020, the total adjustment agreed will be 7.7 mmbbl per day.
It will be followed by a 5.8 mmbbl per day adjustment for a period of 16 months, from 1 January 2021 to 30 April 2022.
The baseline for the calculation of the adjustments is the oil production of October 2018, except for Saudi Arabia and Russia, both with the same baseline level of 11.0 mmbbl per day. The agreement will be valid until 30 April 2022, however, the extension of this agreement will be reviewed during December 2021.
Participating members called upon all major producers to provide commensurate and timely contributions to the efforts aimed at stabilising the oil market.
Roger Diwan, vice-president financial services, IHS Markit, commented, “This is a critically-needed relief in the face of declines in crude demand estimated at around 20 MMb/d. Stepping away from a destructive price war, the return to market management by Saudi Arabia and Russia and backed by the US and a very involved President Trump, does mark a physical and psychological inflection point for the oil market.… The record differentials between global benchmarks and physical prices reflect the dual reality of hope and despair.”
Bjornar Tonhaugen, head of oil markets at Rystad Energy, said, “On a positive note, OPEC+ managed to reach a historic deal to make the single largest output cut in history, after a compromise was reached with Mexico.
“However, even though OPEC+ has decided to attempt to bail out the global oil market, the group has unfortunately only come up with half of the ransom money. We believe the market’s disappointment will reflect in prices already from April due the lack of size and the speed of the supply removal.
“At least the global oil market may not exhaust the storage capacity as early as it would without the voluntary production cuts. The oil market will see enormous stock builds in April as the deal is only in effect from 1 May, while gradual shut ins and production declines will already happen during the current month.
“We believe oil prices will see renewed downwards pressure. Further down the line, however, this deal may be bullish as OPEC+ plans to endure with the six million bpd cut through 2021, when oil demand most likely will have recovered back to normal and as supply capacity will have sustained a lasting damage.”
