Russia, Nigeria and Iraq also agree to 10 million bpd cut
The Organization of the Petroleum Exporting Countries (OPEC) and allied nations agreed on Saturday to extend a record production cut through to the end of July. The move hopes to encourage stability in energy markets hit hard by the global economic crisis induced by the COVID-19 pandemic.
The output cuts represent around 10 percent of the world’s overall supply.
OPEC and its allied nations (also known as OPEC+) agreed in April to cut supply by 9.7 million bpd in May and June to prop up crude prices that have collapsed due to the COVID-19 crisis. Brent crude climbed to a three-month high of US$42 a barrel on Friday, after diving below US$20 in April. Prices remained a third lower than at the end of 2019.
“Demand is returning as big oil-consuming economies emerge from pandemic lockdown. But we are not out of the woods yet and challenges ahead remain,” said Saudi energy minister Prince Abdulaziz bin Salman.
Similarly, Algerian Oil Minister Mohamed Arkab, the current OPEC president, warned that the global oil inventory would soar to 1.5 billion barrels by the mid-point of this year. “Despite the progress to date, we cannot afford to rest on our laurels,” Arkab said. “The challenges we face remain daunting.”
The deal was brokered in an unusual move by US president Donald Trump, who wants to avoid US shale bankruptcies. This came on the back of a Saudi-Russia oil price war which sent the prices of Brent crude crashing by 30 percent, the largest drop since the Gulf War.
“I applaud OPEC-plus for reaching an important agreement today which comes at a pivotal time as oil demand continues to recover and economies reopen around the world,” the US energy secretary, Dan Brouillette, wrote after the extension.
Analysts had expected only a one-month extension given the still fluctuating level of demand.
“If the demand is great, countries like Russia will want to produce more oil, so they probably won’t want to get locked into a longer-term deal that may not help them,” said Jacques Rousseau, managing director at Clearview Energy Partners.
In a research note, Clearview also said on Saturday that OPEC “appears to be going to great lengths to keep the deal together despite unequal compliance,” trying to avoid public fights on the issue.
“That solution might work today, but not repeatedly,” it said, citing reports of rising Libyan output and the end of production cuts from Mexico that will heighten the need for compliance.
Iraq, with one of the worst compliance rates in May, agreed to extra cuts although it was not clear how it would reach agreement with oil majors on curbing Iraqi output.
Iraq produced 520,000 bpd above its quota in May, while overproduction by Nigeria was 120,000 bpd, Angola’s was 130,000 bpd, Kazakhstan’s was 180,000 bpd and Russia’s was 100,000 bpd, OPEC+ data showed.