OPEC and allied nations agreed Saturday to extend a production cut of nearly 10 million barrels of oil a day through the end of July, hoping to encourage stability in energy markets hard hit by the coronavirus-induced global economic crisis.
Ministers of the cartel and outside nations led by Russia met via video conference to adopt the measure, aimed at cutting the excess production depressing prices as global aviation remains largely grounded due to the pandemic.
The curbed output represents some 10 per cent of the world’s overall supply.
But danger still lurks for the market, even as a number of nations ease virus-related lockdowns, and enforcing compliance remains thorny.
Algerian Oil Minister Mohamed Arkab, the current OPEC president, warned meeting attendees that the global oil inventory would soar to 1.5 billion barrels by the mid-point of this year.
“Despite the progress to date, we cannot afford to rest on our laurels,” Arkab said. “The challenges we face remain daunting.”
That was a message echoed by Saudi Oil Minister Abdulaziz bin Salman, who acknowledged “we all have made sacrifices to make it where we are today.” He said he remained shocked by the day in April when U.S. oil futures plunged below zero.
“There are encouraging signs we are over the worst,” he said.
Russian Energy Minister Alexander Novak similarly called April “the worst month in history” for the global oil market.
The decision came in a unanimous vote, Energy Minister Suhail al-Mazrouei of the United Arab Emirates wrote on Twitter. He called it “a courageous decision.”
But it is only a one-month extension of a production cut that was deep enough “to keep prices from going so low that it creates global financial risk but not enough to make prices very high, which would be a burden to consumers in a recessionary time,” said Amy Myers Jaffe, senior fellow at the Council for Foreign Relations.
“There is so much uncertainty that I think they took a conservative approach,” she said. “You don’t know how much production is going to come back on. You don’t know what’s going to happen with demand. You don’t know if there’s going to be a second (pandemic) wave.”
Jaffe said improved oil demand in China and Asia and a gradual stabilization of demand in the United States and to some extent Europe, where there’s some cautious economic reopening, were encouraging for producers.
OPEC has 13 member states and is largely dominated by oil-rich Saudi Arabia. The additional countries involved part in the so-called OPEC Plus accord have been led by Russia, with Mexico under President Andres Manuel Lopez Obrador playing a considerable role at the last minute in the initial agreement.
Crude oil prices have been gaining in recent days, in part on hopes OPEC would continue the cut. International benchmark Brent crude traded Saturday at over US$42 a barrel. Brent had crashed below US$20 a barrel in April.
Earlier this year, when demand was down, Saudi Arabia was flooding the market with crude oil, helping to send prices down to record lows. That prompted the U.S. government in April to take the unusual step of getting involved in OPEC’s negotiations, pressuring members of the cartel to agree to cuts to help end the oil price free-fall.
At the time, U.S. President Donald Trump said the U.S. would help take on some of the cuts that Mexico was unwilling to make. And perhaps more importantly, a group of U.S. senators upset over the impact on U.S. shale production said at the time that they had drafted legislation which would remove American forces, including Patriot Missile batteries, from Saudi Arabia.
Under a deal reached in April, OPEC and allied countries were to cut nearly 10 million barrels per day until July, then 8 million barrels per day through the end of the year, and 6 million a day for 16 months beginning in 2021.
In a rambling Rose Garden speech on Friday, Trump took credit for the April deal. “People said that wasn’t possible but we got Saudi Arabia, Russia and others to cut back substantially,” he said. “We appreciate that very much.”
U.S. Energy Secretary Dan Brouillette tweeted his applause Saturday for the extension, which he said comes “at a pivotal time as oil demand continues to recover and economies reopen around the world.”
However, some countries have been producing beyond quotas set by the deal. One was Iraq, which remains decimated after a years-long war against the Islamic State group. Iraq Oil Ministry spokesman Assem Jihad said in a statement that Baghdad had “renewed its full commitment” to the OPEC Plus deal.
Analysts had expected only a one-month extension given the still fluctuating level of demand.
“If the demand is great, countries like Russia will want to produce more oil, so they probably won’t want to get locked into a longer-term deal that may not help them,” said Jacques Rousseau, managing director at Clearview Energy Partners.
In a research note, Clearview also said Saturday that the producers group “appears to be going to great lengths to keep the deal together despite unequal compliance” — trying to avoid public fights on the issue.
“That solution might work today, but not repeatedly,” it said, citing reports of rising Libyan output and the end of production cuts from Mexico that will heighten the need for compliance.
Major production cuts are simply untenable for countries such as Iraq, Oman and Ecuador, whose economies depend nearly exclusively on petroleum income, as they could face debt default.