On April 12, the Organisation of the Petroleum Exporting Countries, Russia, and other oil-producing nations, a group known as OPEC+, agreed to cut output by a record amount, representing around 10 percent of global supply, to support oil prices amid the coronavirus pandemic.
OPEC+ agreed to reduce output by 9.7 million barrels per day (bpd) for May-June, after four days of marathon talks and following pressure from US President Donald Trump.
President Donald TRUMP cheered the agreement saying in a tweet that “The big Oil Deal with OPEC Plus is done. 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. I just spoke to them from the Oval Office. Great deal for all!”
On April 09, OPEC+ said the cuts will then taper to 7.7 million bpd from July through the end of 2020, and 5.8 million bpd from January 2021 through April 2022. The 23-nation group will meet again on June 10 to determine if further action is needed.
OPEC+ has said it wanted producers outside the group, such as the United States, Canada, Brazil, and Norway, to cut a further 5 percent or five million bpd.
Canada and Norway had signaled willingness to cut and the United States, where legislation makes it hard to act in tandem with cartels such as OPEC, said its output would fall steeply by itself this year due to low prices.
On April 13, 2020, oil prices rallied due to the output cut deal. The international benchmark, Brent crude, was up by 5%, at $33.08 (€30.27) a barrel.
The agreement came after an almost nine-hour video conference held by energy ministers of major oil-producing countries, and it was confirmed in a statement from Kazakhstan’s energy ministry.
22 of the 23 participating countries have to cut production by 23% in comparison with the level of production of October 2018. Russia and Saudi Arabia are to reduce production from 11 million bpd to 8.5 million bpd. Mexico refused to reduce production by the proposed 400,000 barrels per day and only agreed to cut it by 100,000 barrels.
Trump had threatened OPEC leader Saudi Arabia with oil tariffs and other measures if it did not fix the market’s oversupply problem as low prices have put the US oil industry, the world’s largest, in severe distress.
A worldwide lockdown to slow the spread of the coronavirus pandemic has cut fuel demand by roughly 30 percent and contributed to a crash in prices that took major benchmarks down by more than two-thirds before they recovered in recent days in anticipation of action from oil producers. The US shale industry is more vulnerable to low prices due to its higher costs.
US output has fallen as oil prices take a dive and that it expects US output to fall by nearly two million bpd by next year.
The cut will have a significant impact in the second half of the year and help lift prices to the mid-$40s by year-end, but that there will be short-term pain while the market re-balances.
Lukoil Vice President Leonid FEDUN, who was among the few who criticized the idea of Russia’s breakup with OPEC in the first place, told reporters that if the new deal had not been made, global oil storage would have been full up in 40-45 days, Russia would have had to “freeze” its oil fields and sell oil for $15-20 per barrel. The new deal, according to the oil tycoon, is expected to keep prices within the range of $30-$40 per barrel and bring Russia $70 million to $80 million per day, which makes the deal a reasonable choice. Lukoil is Russia’s largest private oil company.
A 15 percent cut in supply might not be enough to arrest the price decline, banks Goldman Sachs and UBS predicted last week, saying Brent prices would fall back to $20 per barrel from $32 at the moment and $70 at the start of the year.
“There’re some 180,000 operating oil wells in Russia. … In order to cut production by 23% they have to shut about 14,000 wells. On average, one well produces 9.5 tons of oil per day. By comparison, in Saudi Arabia one well produces 1,000-2,000 tons per day. This means Russia has to shut 16 times more wells. Now, in order for them to be shut down, companies would have to turn off electricity to the oil wells, cease water flooding them, etc. Technically it’s not very complicated but it’s hard to resume production at these wells afterward. If such wells stay out of operation for about two months, deposits of paraffin and searing will form that will have to be cleaned up. In the north (where most Russian oil fields are) the wells also get frozen over, hydrates of hydrocarbon gases get formed and one would have to use solvents, take out the pumping machinery to have it cleaned, etc. It’s an expensive routine,” Mikhail KRUTIKHIN, a partner at RusEnergy, a Moscow-based consultancy that specializes in monitoring and analysis of the oil and gas industry of Russia and in other post-Soviet areas, said.
He continued “Even if some of these reserves can be made to resume their production activities, there will be no money for opening new reserves. There will be a shortage of revenue and in order to satisfy domestic consumption, they will have to cut down on exports. This means that even if the new OPEC+ deal has the price of oil slightly increased, there will still be less income coming to the [state] budget because of the export cuts. This is a financial disaster. The consequences for ordinary people will be gruesome.”
Perhaps, in order to avoid these grave implications, the Russian Energy Ministry stressed that the deal is tentative and can be adjusted. “We agreed that the time frame [for the deal] is two years. This is the time frame that is the most effective for the market, in order to send a signal that the countries are serious about taking measures to restore the situation on the market, to restore the balance of demand and supply,” Russian Energy Minister Alexander NOVAK said after the talks.
He said that if the market situation improves more quickly than expected, production decisions could be changed. NOVAK said Russian companies were ready for the production cuts and the government was “in contact with top executives of oil companies.”
The report used data from Bloomberg, Al-Jazzera, Al-Monitor, Nbcnews, and DW.
The source of photo: Telesurenglish.