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OPEC+ cuts deep into global supply, but not deep enough
COMMENTARY
WHAT:
The OPEC+ group is set to cut global oil production by 10% to support prices.
WHY:
The COVID-19 crisis has caused unprecedented oil demand destruction.
WHAT NEXT:
The lack of support from other producers could cause the pact to collapse.
OPEC and its allies have finalised an historic deal to take 9.7mn barrels per day (b/d) of oil supply off the market – just under 10% of global pro- duction – to help the industry through its worst crisis in a century.
Following emergency talks on April 9, the group originally proposed a greater reduction of 10mn b/d, but Mexico dragged its heels in committing to its share of the cuts. The deadlock was ended during a second round of talks on April 12. Under the new agreement, Mexico will remove only 100,000 b/d of supply, instead of the 400,000 b/d it had initially been asked to cut.
While OPEC+’s reduction will ease the unprecedented supply glut caused by the coro- navirus (COVID-19) pandemic, critics say it goes nowhere near far enough. Russia and Saudi Arabia have called on the US and other produc- ers not party to the deal to cut global output by a further 5%. But they are yet to secure any firm promises on this score.
An historic deal
OPEC and its allies in the larger OPEC+ group met for emergency talks via video link on April 9, to discuss a response to the COVID-19 crisis. Ahead of the negotiations, the oil cartel’s secre- tary general, Mohammed Barkindo, warned that the industry faced a “horrifying” outlook.
“COVID-19 is an unseen beast that seems to be impacting everything in its path,” he said in opening markets, noting that no areas of the economy were unaffected by the pandemic.
“For the oil market, it has completely up-ended market supply and demand
fundamentals since we last met on March 6,” he said. “Even in the first week of March the outlook looked relatively bleak, but in just over one month it has changed beyond all recognition. The supply and demand funda- mentals are horrifying; the expected excess supply volumes on the market, particularly in Q2 2020, are beyond anything we have seen before.”
The industry is “haemorrhaging,” he warned, and “no one has been able to stem the bleeding.” The result of these talks was a declaration of co-operation, envisaging a 10mn b/d reduc- tion to supply in May and June. This was low- ered to 9.7mn b/d, to accommodate Mexico’s
smaller quota.
The cuts will be borne by OPEC’s members
and OPEC+ producers Russia, Mexico, Kazakh- stan, Oman, Azerbaijan, Malaysia, Bahrain, Sudan, South Sudan and Brunei. Between July and December 2020, the cuts will be eased to 7.7mn b/d, and then to 5.8mn b/d between Jan- uary 2021 and April 2022.
Each participating country will use their out- put in October 2018 as a baseline for the cuts, save for Russia and Saudi Arabia, which will both use 11mn b/d as their baseline. According to OPEC+ documents, each country will reduce their baseline production by 23%. For Russia and Saudi Arabia, this means maintaining their respective outputs at around 8.5mn b/d in May and June. Russian production averaged 11.3mn b/d in March, while Saudi Arabia claimed to have ramped up supply to 12mn b/d at the start of this month.
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w w w . N E W S B A S E . c o m Week 15 16•April•2020