By Alexander Miller, consultant in emerging markets, for Eurasia Business News – May 1, 2020
Oil storage tanks, 2020 – Source : Pixabay
Oil prices rise as the OPEC + agreement reached on April 12 to cut the global oil output to stabilize the market comes into force on May 1.
The agreed reduction by 9.7 million barrels per day will be from May 1st until June 30. OPEC + countries then will cut the oil output from 1 July 2020 to 31 December 2020 by 7.7 million bpd.
This six months period will be followed by a reduction by 5.7 million barrels per day for a period of 16 months, from 1 January 2021 to 30 April 2022.
The baseline for the quota calculation of this reduction is the oil production in 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.
According to the OPEC + Declaration the agreement will be valid until 30 April 2022. However, the extension of this agreement will be discussed during December 2021.
Under this unprecedented OPEC + deal, Russia must reduce oil production in May-June 2020 by 2.5 million barrels. Therefore, the expected Russia’s oil output for May –June is 8.5 million bpd.
All Russian oil companies will take part in the reduction, quotas are distributed proportionally.
On April 10, the G20 agreed to maintain the stability of the global market in the context of the COVID-19 pandemics and create a working group to monitor the response.
The OPEC + countries finalized the reduction agreement on April 12, reducing the share of Mexico, which agreed to reduce production by 100 thousand bpd instead of 400 thousand bpd.
In the first week of April, when the deal was being discussed, the drop in demand due to the coronavirus pandemic was estimated at 15-20 million bps.
However, the coronavirus outbreak worldwide and the economic lockdown it has caused would have destroyed oil demand in April by 25-30 million bpd and experts do not rule out that an additional reduction in production may be needed in coming months.
On May 1st, the Brent crude futures rose to 26.44 USD/bbl and the WTI crude price reached 19.78 USD/bbl.
Before the OPEC + reduction agreement, on April 9, the Brent crude price was 31.48 USD/bbl and the WTI crude oil price was 22.76 USD/bbl.
The market is now crushed by an oversupply of crude amid falling demand due to the global coronavirus pandemics which has stopped economies around the world. But if the global oil demand is expected to improve as lockdowns are eased in several countries and regions, like in China, the crude storage facilities are almost full worldwide. Any increase in demand will not generate a supply deficit.
On average, the OPEC members have pumped 30.25 million barrels per day (bpd) in April, according to a survey by Reuters, up 1.61 million bpd from March’s revised figure.
On March 6, the OPEC + member countries could not agree on reduction of oil production. As a result, the agreement in force fell apart. Following this failure, the Kingdom of Saudi Arabia increased its oil output to 10-12 million barrels per day and set lower prices for its oil to put pressure on Russia, another leading oil producer. Both countries could find compromise during the negotiations that led to the deal of April 12, providing for cut from May 1.
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