OPEC and Russia extend historic production cuts by one month

Screenshot of the OPEC + meeting, Saturday June 6, 2020.
Screenshot of the OPEC + meeting, Saturday June 6, 2020. Twitter / Amena Bakr

This is news that reassures both Donald Trump, Vladimir Putin and the Saudi inheriting prince Mohammed Ben Salmane (MBS). Meeting on Saturday June 6 by videoconference, the main oil exporting countries agreed to extend for one month the agreement obtained at the end of April to sharply reduce oil production in an attempt to push up oil prices which were collapsed.

The Organization of the Petroleum Exporting Countries (OPEC), led in fact by Saudi Arabia, on the one hand, and a dozen other petroleum countries allied with Russia on the other, have agreed in the framework of the so-called “OPEC +” alliance to maintain the level of production cuts until the end of July. This one-month extension may seem minimal, but it will be welcomed with sympathy by the players in an oil market that was completely shaken up during the period of the health crisis.

In early March, as the coronavirus pandemic spread across the planet, this OPEC + alliance was shattered – Russia refused to impose new production quotas to stem the decline in prices. This unexpected disagreement led the two ex-allies, Moscow and Riyadh to embark on a rapid price war, resulting in a meteoric oil crisis, the price of a barrel dropping from 53 to 37 dollars in a few days.

Slow rise in prices

But to this battle of oil giants has been compounded by the worsening health crisis – and the implementation of drastic containment measures. In April – now nicknamed “Black april” by specialists – world demand has fallen by 30 million barrels a day, a drop never seen before. The price of a barrel is collapsing: a barrel of Brent, which refers to the world level, fell below 16 dollars at the end of April. At the same time, the price of the American barrel, the WTI, even became negative for a few hours. Global stocks are filling up fast, as cars and planes are shutdown in much of the world. The storage capacities are not infinite.

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Under pressure from Donald Trump – who sees the risks for his own oil industry – Russians and Saudis finally agree at the end of April, and pledge to massively reduce production: 9.7 million barrels per day less in May and June. A historic drop, which is accompanied by measures taken by several large consumer countries, such as the United States or China, to increase their stocks. At the same time, US shale oil production has started to decline, as many players cannot survive with such a low oil price.

These factors have allowed the price per barrel to rise gradually since the beginning of May, and exceed 40 dollars in early June. By extending their agreement, Russia and Saudi Arabia hope to further support oil prices. “The oil market is recovering. Global supply has already shrunk massively “, says Ann-Louise Hittle of the global energy and chemical research and advisory group, among others, WoodMacKenzie. “At the same time, overall demand has started to rise again, with the loosening of containment measures”.

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Respect of the agreement

But to have an impact, such an agreement must be scrupulously respected by the countries concerned. Data provider Kpler calculates that OPEC + cut production by around 8.6 million barrels per day in May, 11% below expected volume. “This alliance works on trust between countries rather than on a mechanism for penalizing those who are above their quotas”, says Bjornar Tonhaugen of Rystad Energy. For several days, Saudi Arabia and Russia have exerted strong pressure on certain countries which have not respected their commitments of May and June, in particular Iraq and Nigeria. Russian Minister of Energy Alexander Novak warned at the start of the meeting that the commitments made should be respected ” 100 % ” by all the countries participating in the agreement.

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