Opec+ Finalises Deal on Oil Output Cuts
Opec and its allies have finalised a deal on cutting global oil production to prop up prices, following another round of talks on April 12.
The group's 13 members, along with their 10 partners in the larger Opec+ group, will now reduce their supply by 9.7mn b/d in May and June, down from the 10mn b/d cut initially proposed after negotiations on April 9. Mexico opposed the 400,000 b/d it was originally asked to make, and in a second meeting on April 11, Opec+ agreed to the country's request for a smaller cut of only 100,000 b/d.
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Under the finalised agreement, the cuts will be eased to 7.7mn b/d between July and December 2020, and then 5.8mn b/d between January 2021 and April 2022, Opec said in a statement. As per the original proposal, Russia and Saudi Arabia will use 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.
Opec+ agreed to Mexico's request after the US stepped in and said it would reduce its own output by 250,000 b/d to help the Latin American country fulfil its original quota. However, US president Donald Trump did not say whether Washington would impose cuts on US producers, beyond those they have already for economic reasons, to achieve this. It is unclear whether the US move helped break the deadlock.
Brent futures have risen 3.43% since markets opened on April 13, to $32.56/b, while West Texas Intermediate has climbed 3.56% to $23.57/b. Norway's Rystad Energy warns that prices will slide moving forward, however, to reflect the market's disappointment that Opec+ did not commit to a bigger reduction in output.
"Even though Opec+ has decided to attempt to bail out the global oil market, the group has unfortunately only come up with half of the ransom money. We believe the market’s disappointment will reflect in prices already from April due the lack of size and the speed of the supply removal," the consultancy said in a research note on April 12.
Opec+ had called on other producers to take a further 5mn b/d of supply offline to support prices. G20 energy ministers meeting on April 10 promised to work together to stabilise oil prices, but did not make any specific commitments on production restrictions.
"This is at least a temporary relief for the energy industry and for the global economy. This industry is too big to be let to fail, and the alliance showed responsibility with this agreement," Rystad analyst Magnus Nysveen says. "Even though the production cuts are smaller than what the market needed and only postpone the stock building constraints problem, the worst is for now avoided."
Other oil producing countries need to cut their own output to align it with global fuel consumption, which is expected to drop 27mn b/d in April and 20mn b/d in May as a result of Covid-19 restrictions on travel, Rystad said.