Oil refinery – Source : Pixabay
The representatives of the 23 countries engaged in negotiations on a new OPEC + agreement through video conference came to the common ground on April 9 that it was necessary to reduce their crude oil output to avoid a further decrease of the crude price, amid global economic slowdown due to the coronavirus outbreak worldwide.
These unprecedented talks in OPEC history aim at stabilizing the global crude market. The source of the negotiations is the fall of oil prices worldwide amid the coronavirus pandemic and the collapse in early March of the OPEC + deal to reduce crude oil production. One month ago, the producing countries had been unable to agree either to change the parameters of the deal to reduce oil production, or to extend it.
The negotiations backed by the G20 countries are about reducing the global oil output by 15%, which is the deepest cut ever agreed.
The agreement came as the oil storages are almost full. However, experts are not sure that it will be enough to break the plunge of oil prices and warn that policing the countries’ pledges to limit oil supplies will be hard. The coming months will show the picture.
On April 9, the Brent crude price was 31.48 USD/bbl and the WTI crude oil price was 22.76 USD/bbl.
The same day, the price of OPEC basket of thirteen crudes stood at 21.19 USD/bbl. The price was 22.67 USD on April 8, reported the organization.
The members states of the OPEC + held talks on April 9 through video conference during nine hours. The parties agreed to continue the talks on April 10. The final decision was postponed because of the position of Mexico, which refused to reduce its oil production by the asked volumes.
These negotiations enabled Russia and Saudi Arabia to end their oil price war started in early March. The Saudi Kingdom has been offering its oil at a discount in Europe of USD 10 per barrel. Now the price war is over.
The new OPEC + agreement is expected to run until May 1, 2022 and gather 23 countries.
According to the official declaration following the Ministerial meeting dated April 9, the global oil output will be cut by 10 million barrels per day during the first two months, from May to June 2020.
From 1 July 2020 until 31 December 2020, the oil production will be partially restored and the output will be cut by 8.0 million barrels per day.
The Russian Energy Minister Alexander Novak confirmed these figures.
This six months period will be followed by a reduction by 6.0 million barrels per day for a period of 16 months, from 1 January 2021 to 30 April 2022. The baseline for the calculation of this cut is the oil production of October 2018, except for the Kingdom of Saudi Arabia and the Russian Federation, both with the same baseline level of 11.0 million barrels per day. The Declaration provides that the agreement will be valid until 30 April 2022. However, the extension of this agreement will be discussed during December 2021.
The Declaration was agreed by all the OPEC and non-OPEC oil producing countries participating in the Declaration of Cooperation signed in December 2016, with the exception of Mexico.
Indeed, Mexico is still hesitating. A compromise was in discussion on April 11, backed by the United States. The US President Donald Trump told the Mexican President Andrés Manuel López Obrador that Washington would cut the US oil production by 250,000 barrels a day so that Mexico would cut its output by only 100,000 barrels a day.
The crude output would be additionally cut by 5 million barrels a day, thanks to the expected decrease in production made by the United States, Canada, Norway and other countries that are not formally parties to the OPEC + Agreement reached on April 9.
The Russian Energy Minister Alexander Novak stressed that, if necessary, the parties can take additional measures to stabilize the oil market situation : “We will need to monitor the situation on the market, it will change. And if necessary, additional measures will be taken, or production will be restored in faster ways […]”.
Thanks to the OPEC + agreement, the oil price range is expected to be USD 30–40. In such conditions, the Russian Federation would receive a cash flow worth USD 70-80 million of additional income per day.
The Declaration following the OPEC Ministerial meeting of April 9 also call upon all major producers to contribute to the efforts aimed at stabilizing market.
Reducing the global crude output to stabilize the oil market can be praised. However, stimulating demand during the coronavirus pandemic and the lockdowns of major economies is even harder.
In addition, huge amounts of oil have been accumulated. It will take time to sell this oil in the market amid economic slowdown.
Lastly, it will not be easy for the United States, Russia, Saudi Arabia or Iran to work together and trust each other about policing the decrease in oil output. Diplomats and energy executives will have much to do.
The Declaration published on April 9 provides that the next OPEC Ministerial meeting is scheduled on June 10 2020 via videoconference, to decide further actions, as needed to balance the global oil market.
The OPEC (Organization of Petroleum Exporting Countries) was founded in 1960 and gathers 14 Member States, all crude oil producers. Headquartered since 1965 in Vienna, Austria, this intergovernmental organization mainly coordinate and unify the petroleum policies of its member countries and ensure the stabilization of oil markets.
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© Copyright 2020 – Swann Bigot, legal expert and author, for the platform Eurasia Business News
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