Opec Deal Disappoints, But Buys Time
Saudi Arabia, Russia and other leading oil producers have reached a tentative agreement to cut supply by 10mn b/d – equal to around 10% of global production – in an effort to bolster oil prices, Opec has announced.
The cuts will apply in May and June, and will be shared among Opec’s 13 members and the group’s allies in the Opec+ group, consisting of Russia, Mexico, Kazakhstan, Oman, Azerbaijan, Malaysia, Bahrain, Sudan, South Sudan, and Brunei. All parties have agreed to the deal save Mexico, whose consent is required for the pact to be finalised.
Russia and Saudi Arabia have agreed to set 11mn b/d as a baseline for the reductions, meaning their share of the cuts will be deducted from this level. For other producers, the baseline will be their output in October 2018. The cuts will be eased to 8mn b/d between July and December 2020 and then 6mn b/d between January 2021 and April 2022.
Another 10 major producers – Argentina, Brazil, Egypt, Indonesia, Canada, Colombia, Norway, the US, the UK and Trinidad & Tobago – were understood to have been invited to the supply talks as observers. According to Opec, only Argentina, Colombia, Ecuador, Egypt, Indonesia, Norway and Trinidad & Tobago attended, however.
Ahead of the negotiations, Russia and Saudi Arabia had called on the US and other non-Opec+ producers to take part in the cuts. None of the observer countries have committed to this, although Norway said earlier it would consider reducing its output unilaterally if a deal was struck. The US, the world's biggest producer, expects its output to fall by around 2mn b/d next year anyway because of low oil prices.
Both Norway and the US are members of the Organisation for Economic Co-operation and Development, which has rules banning co-ordinated output restrictions and other market collusion. In its statement, Opec urged "all major producers to contribute to the efforts aimed at stabilising the market."
Additional supply cuts are set to be discussed at the G20 meeting of energy ministers on April 10.
Brent futures have fallen 4.14% today to $31.48/b, signalling disappointment that Opec and its partners did not agree to bigger reduction to offset the impact of the Covid-19 crisis on fuel demand. Expectations are that global oil consumption will slump by between 17mn b/d and 22mn b/d this month alone, because of ongoing travel restrictions and other measures to slow the spread of the pandemic. Earlier it was reported that the producers were considering scaling back supply by as much as 20mn b/d.
Edinburgh-based Wood Mackenzie said the 10mn b/d cut "would be very supportive of price over the second quarter."
"“Even a 5mn b/d reduction would see oil prices in the low $30s. It would ease pressure on storage and stem the steep price collapse we saw in March," WoodMac analyst Ann-Louise Hittle said in a research note. "A 10mn b/d reduction may seem small compared with some very high demand loss estimates, but if the curbs are implemented? It would slow the build-up in storage and avoid the surplus of supply over the second quarter, when the Covid-19 shutdowns are the extensive and demand lowest.”
Norway's Rystad Energy said the agreed reduction "will keep the world from physically testing the limits of storage capacity and save prices from falling into a deep abyss, but it will still not restore the desired market balance."
Even if the US, Canada, Norway and Brazil were to remove a further 5mn b/d from the market in May and June, a supply glut of 5-10mn b/d will remain, the consultancy said. However, the Opec+ deal does buy time, it continued, for demand to recover as lockdowns in parts of Europe are lifted, and for suppliers to make cuts to spending needed to survive.