Page 6 - AfrElec Week 15

AfrElec COMMENTARY AfrElec
OPEC+ cuts deep into global supply, but not deep enough
GLOBAL
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 (bpd) 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 bpd, but Mexico dragged its heels in com- mitting to its share of the cuts.
The deadlock was ended during a second round of talks on April 12. Under the new agree- ment, Mexico will remove only 100,000 bpd of supply, instead of the 400,000 bpd 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 theindustryfaceda“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 funda- mentals 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 fundamentals are hor- rifying; 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 bpd reduction to supply in May and June. This was lowered to 9.7mn bpd, to accommodate Mexico’s smaller
quota.
The cuts will be borne by OPEC’s mem-
bers and OPEC+ producers Russia, Mexico,
Kazakhstan, Oman, Azerbaijan, Malaysia, Bah- rain, Sudan, South Sudan and Brunei. Between July and December 2020, the cuts will be eased to 7.7mn bpd, and then to 5.8mn bpd between January 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 bpd 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 bpd in May and June.
Russian production averaged 11.3mn bpd in March, while Saudi Arabia claimed to have ramped up supply to 12mn bpd at the start of this month.
Disappointment
Global fuel demand has dropped by around 30mn bpd, as efforts to slow the spread of the COVID-19 pandemic have led to grounded planes, drastic cuts in vehicle use and reduced economic activity.
“The proposed 10mn bpd cut by OPEC+ for May and June will keep the world from physi- cally testing the limits of storage capacity and save prices from falling into a deep abyss, but it willstillnotrestorethedesiredmarketbalance,” Rystad Energy said in a research note.
The Norwegian consultancy estimates the demand-supply imbalance at 27.4mn bpd in April – a glut which is physically impossible for the market to absorb.
Global storage is already 79% full, according to Rystad, meaning that only around 1.5bn bar- rels of capacity is still available. And not all mar- kets have equal access to this remaining storage, which is mostly located in China and the US.
What the OPEC+ deal does is buy time, for fuel demand to recover, storage operators to overcome constraints and potentially expand their capacity, and other producers to make necessary cutbacks to stay afloat.
Lacklustre support
The US – concerned about the impact of low oil prices on its indebted shale oil industry – indi- cated it would help Mexico meet its quota by reducing its own output by 250,000 bpd. This may have helped break the deadlock, although Washington has not said whether it will impose
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w w w . N E W S B A S E . c o m Week 15 16•April•2020