OPEC+ Decisions Could Curb Oil Supply by 20%

OPEC+ Decisions Could Curb Oil Supply by 20%

The Organization of the Petroleum Exporting Countries and its allies (OPEC+)  announced on April 12 a record oil deal that will cut oil production by 10 million barrels per day (mmbbl/d) effectively from May 1 through June 30, curbing global oil supply by 20%.

The reduction will continue from July until December by 8 mmbbl/d, followed by 6 mmbbl/d cuts for 16 months beginning from January 2021 until April 2022. 

The Opec+ decision aimed at finding a solution to the grave decline in global oil prices that were hit by the coronavirus (COVID-19) pandemic. Prior to the meeting, the OPEC basket price had reached $21.19 bbl/d , and Brent Crude had reached $31.48 bbl/d, the lowest since 2008’s $30.28. Additionally, the OPEC+ group also aimed to find a way to stabilize the market and return the equilibrium of supply and demand to its place.

The deal was supposed to be finalized on April 9, however, Mexico held up the deal by opposing to cut 400,000 barrels per day (bbl/d). Under the final deal, Mexico will only limit its production by 100,000 bbl/d. Kuwait will cut its production by one million bbl/d, considering that its current production in April has reached 3.25 million bbl/d. Saudi Arabia’s Energy Minister, Prince Abdulaziz Bin Salman, told Reuters that OPEC+ effective oil cuts would amount to 12.5 million bbl/d as Saudi Arabia, the United Arab Emirates (UAE) and Kuwait would cut their oil production even steeper given the higher output in April.

After the meeting, oil prices surged recording $23.09 per barrel for the US West Texas Intermediate crude, while Brent crude recorded $31.74 per barrel as of April 13.  Ed Morse, Citi’s global head of commodities has mentioned that these production cuts will significantly impact the H2 2020, noting that oil prices could hike up to $40 by the end of the year. Donald Trump, President of the United States, has tweeted about the OPEC+ decisions saying that it is a “great deal for all” that “will save hundreds of thousands of energy jobs in the United States.”

Per Magnus Nysveen, Rystad Energy’s Head of Analysis commented on the OPEC+ decisions saying that “even though the production cuts are smaller than what the market needed and only postpone the stock building constraints problem, the worst is for now avoided.”

On the other hand, this does not mean the oil crisis is averted,  as Tom Kloza, Chief Oil Analyst for the Oil Price Information Service, commented that “this cut is woefully inadequate to stabilize prices into at least the summer,” according to CNN.

The OPEC+ expressed hopes that other oil-producing countries outside of the OPEC+ group, such as Brazil, Canada, Indonesia, Norway and, the US would also limit their oil production. The US Energy Secretary Dan Brouillette said that by the end of the year, about two million bbl/d of US production would have been taken offline, and could likely reach 3 million.

It should be noted that in February of this year, the OPEC+ has failed to reach an agreement on cutting production as a result of the COVID-19 pandemic which has affected the oil prices significantly. The OPEC+ group could not reach a consensus as Saudi Arabia was pushing for an output cut of up to 600,000 bbl/d which was not welcomed by Russia at the time.

Another meeting is scheduled to be held on June 10, 2020, to determine other necessary measures to achieve balance in the global oil market.


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