In a watershed moment
for the oil and gas industry, OPEC and its allies in the OPEC+ group finalized
a deal on Easter Sunday that, in conjunction with efforts from the G20 and
International Energy Agency, could see up to 20 million barrels of oil per day
removed from a severely oversupplied oil market. The deal is set to boost the
oil price and provide some much-needed stability for an industry in crisis.
Initially announced Thursday, the agreement was
delayed as Mexico refused their share of production cuts. The original OPEC+
deal would have seen a cut of 10 million barrels of crude per day from an
October 2018 baseline, for an initial two-month period. With OPEC+ letting
Mexico off the hook, the official OPEC+ cut now stands at 9.7 million barrels,
as Mexico agrees to cut 100,000 barrels per day instead of 400,000 barrels per
day.
In reality, however, the OPEC+ deal will cut
more than the quoted 9.7 million barrels, since current production levels are
much higher than the October 2018 baselines used to calculate the production
cuts. The deal sees Russia and Saudi Arabia absorbing the brunt of the cuts,
each agreeing to cut their production down to 8.5 million barrels per day.
Saudi Arabia’s production stood at 12.3 million barrels per day, and Russia was
producing 11.29 million barrels of oil per day in March. Both countries,
however, used 11 million barrels per day as their baseline in the deal.
“These production adjustments are historic. They
are largest in volume and the longest in duration, as they are planned to last
for two years. We are witnessing today the triumph of international cooperation
and multilateralism which are the core of OPEC values,” said Secretary General
of OPEC H.E. Mohammed Barkindo. Barkindo also noted that the OPEC+ deal paves
the way for further collaboration with the G20.
In a meeting on Friday, the G20 nations also
agreed to take action to stabilize the market. The United States, for example,
is set to use the Strategic Petroleum Reserve to store vast quantities of oil.
Additionally, the US
will see production cuts of at least 2 million barrels as the market responds
to a lack of demand. The US has also reportedly offered to take on an
additional cut of 300,000 barrels per day on Mexico’s behalf, although the
details of how such a deal would play out have not been released.
The OPEC+ group is expected to request the G20
to cut over 3 million barrels per day of production. The G20 energy ministers
agreed Friday to create a task force to monitor the situation and formulate
strategies. The Texas Railroad Commission, the agency that regulates the
state’s oil and gas industry, is also scheduled to meet on Tuesday to discuss regulating
formal cuts, though the US has largely maintained that the free market will
determine oil production cuts.
US President Donald Trump tweeted his support
for the OPEC+ deal on Sunday.
“This will save hundreds of thousands of energy
jobs in the United States. I would like to thank and congratulate President
Putin of Russia and King Salman of Saudi Arabia,” he said.
Finally, in a reported, but not confirmed, side
deal, Saudi Arabia, Kuwait and the United Arab Emirates could agree to reduce
production by an additional 2 million barrels of oil per day.
OPEC has “Breathed Life” into Africa
The historic production cuts provide a
much-needed financial boost to Africa’s oil and gas producers, including
Nigeria, Angola, South Sudan, Sudan, Gabon, Congo-Brazzaville
and Equatorial Guinea, as the sudden drop in oil
and gas prices coincided with the COVID-19 health crisis and the economic
repercussions of closing businesses and restricting movement to deal with the
pandemic.
Nigeria’s Minister of State for Petroleum
Resources, Mr. Timipre Sylva, said he expects the oil price to rebound by $15
per barrel in a short-term outlook.
“This also promises an appropriate balancing of
Nigeria’s 2020 budget that has been rebased at $30 per barrel,” he said in a
statement.
Chairman of the African Energy Chamber, Mr. NJ
Ayuk, lauded the efforts of the OPEC+ deal, as a stable oil market will provide
economic relief and save jobs throughout the continent.
“OPEC has hit a home run,” Ayuk said. “OPEC has
breathed life and given hope to African nations, oil workers, investors and the
African business community. We need to focus on exploration soon again. Now we
have the ball; we need to run with it and start the process of bouncing back.
We need to defend the African oil industry like a junkyard dog in the face of a
hurricane.”
South Sudan, a member of the OPEC+ alliance,
also welcomed the deal, said the country’s Minister of Petroleum, Mr. Puot Kang
Chol.
“South Sudan is East Africa’s only producing
country. Our production was over 350,000 barrels per day before the civil war.
At the present moment, we are producing about 185,000 barrels per day with a
target on attracting more investment into the oilfields to get our nation to
300,000 barrels per day. The current price war and coronavirus has affected our
economy,” he said.
“We welcome all efforts to stabilize the oil
market and South Sudan will continue to play its role. Our government will
continue doing its utmost best in making the oil production and fighting the
Coronavirus a priority and we will continue collaborating with all our
partners,” he added.
OPEC+ Cuts Respond to Slashes in Demand
Each nation, aside from Saudi Arabia and Russia,
which are both cutting substantially more, is expected to cut 23 percent of
production from May to June. Iran, Libya and Venezuela are exempted from the
production cuts, and Mexico is only cutting 100,000 barrels per day.
After this initial two-month period, overall
production cuts will lower to 8 million barrels per day from July to December and
then lower to 6 million barrels per day from January 2021 to April 2022. The
OPEC+ group will meet in July to discuss further action, if needed.
With about 40 percent of the world’s population
ordered to stay home to stem the spread of COVID-19, demand for oil and gas has
decreased by about 30 percent, from over 100 million barrels per day to under
85 million barrels per day, according to the Energy Information Agency.
The International Energy Agency, which called
for the G20 meeting of energy ministers on Friday, argued the market conditions
were too much for OPEC+ alone to handle.
“The extreme volatility we are seeing in oil
markets is detrimental to the global economy at a time when we can least afford
it,” said Dr. Fatih Birol, Executive Director of the IEA.
“Today’s oil crisis is a systematic shock that
threatens global economic and financial stability. It requires a global answer.
That is why the G20 can be an indispensable forum for decisive leadership when
it is urgently required,” he aded.
Brent crude was averaging $55.70 per barrel in
February, but, with an oil price war and the impacts of COVID-19, both Brent
and WTI have reached their lowest level in years, with Brent hitting $22.76 per
barrel in March, its lowest price since November 2002.
As demand for oil and the price of oil has
declined, storage capacity is also reaching its limits. In just a few weeks,
analysts predict oil production may be shut in due to a lack of global storage
capacity.
- Agency Report