Page 49 - BNE_magazine_05_2020

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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 members and OPEC+ producers Russia, Mexico, Kazakhstan, Oman, Azerbaijan, Malaysia, Bahrain, 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 output 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
Oil prices slid after the OPEC+ deal was announced, signalling markets’ disappointment with the proposed cut. Earlier Reuters and others cited sources as saying that the group had discussed scaling back supply by as much as 20mn bpd.
Global fuel demand has dropped by around 30mn bpd, as efforts to slow the spread of the COVID-19 pandemic
not restore the desired market balance,” 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 barrels of capacity is still available. And not all markets 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
“The proposed 10mn bpd cut by OPEC+ for May and June will keep the world from physically testing the limits of storage capacity but it wont restore the balance”
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 – indicated 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 cuts on US producers to achieve this, beyond
Moscow and Riyadh are particularly anxious to see the US, the world’s number one producer which extracted around 12mn bpd last year, join the pact. The US Energy Department (DoE) said last week that US oil firms were expected
to temporarily scale back production
by almost 2mn bpd anyway, because of cost-cutting measures. But without legal restrictions, these same firms could simply increase flows again once prices recover.
There are some US officials calling for a legislative response, include Ryan Sitton,
supply and demand fundamentals 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.”
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 physically testing the limits of storage capacity and save prices from falling into a deep abyss, but it will still
those they have already made for commercial reasons.
The main risk to the OPEC+ deal is the absence of any other countries outside the group making firm pledges to cut their production. Saudi Arabia and Russia previously said they wanted non OPEC+ producers to take another 5% of global supply offline to support the industry. G20 energy ministers meeting on April 10 agreed to work together to ensure oil price stability, but did not announce any specific commitments.
OPEC+ sources told Reuters that Brazil, Canada, Indonesia, Norway and the US would contribute a further 4-5mn b/d to the cuts. But the countries have not confirmed making any promises. In any case, these will be unchecked voluntary cuts, likely guided by commercial considerations.
"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," Rystad said. "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."
“The industry is “haemorrhaging and no one has been able to stem the bleeding”
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