The article was published in the World Energy Weekly, a publication of Petrostrategies, a French think-tank specializing in energy sector.
On April 9, during an extraordinary eleven-hour video conference (webinar), the OPEC+ countries agreed to slash their production by an official volume of 10 million b/d for May and June 2020, as compared to a benchmark production level of 43.85 million b/d, corresponding to a cut of 22.8%. The implementation of their agreement, however, will depend on the attitude of two countries, Mexico and the United States. Will Mexico pledge to reduce its output by the volume requested by other OPEC+ countries (i.e. 400,000 b/d), or will it persist in wanting to reduce it by only 100,000 b/d? OPEC+’s final statement ends as follows: “The agreement is conditional on the consent of Mexico”, a sentence which was allegedly added at the request of the Saudis. The Mexican minister left the conference before it ended. The decision is now in the hands of his President, Andres Manuel Lopez Obrador (AMLO), one of whose main policy goals is to increase his country’s oil production. During the video conference, AMLO was called by his Venezuelan counterpart, but when PETROSTRATEGIES went to press, he had not yet given an answer. The OPEC+ agreement has therefore not been signed by the countries that negotiated it.
The second question is: how big will the drop in US production be over the coming months, and will it be deemed sufficient by Russia, a key OPEC+ country whose Energy minister seems to have played a central role during the video conference? In Russia, influential political currents refuse to accept that the Americans may continue to increase their oil market share at the expense of the OPEC+ countries which are reducing theirs to support prices. Vladimir Putin’s support for this viewpoint in early March was one of the main reasons why the previous OPEC+ meeting failed on March 6, after which Saudi Arabia launched a price war
The production cuts by OPEC+ countries will be implemented on the baseline of the levels reached in October 2018. However, Saudi Arabia and Russia will have to reduce their output compared to a reference level of 11 million b/d. In so doing, the two countries would therefore theoretically cut their production by 2.5 million b/d each. Together, OPEC+ countries (including Mexico) would reduce their crude oil production to 33.85 million b/d. But although the output of other OPEC countries is currently almost at the same level as in October 2018 (it has fallen by around 500,000 b/d, according to PETROSTRATEGIES’ estimates), that of Saudi Arabia and Russia has varied. The Wahhabi kingdom’s current production is thus estimated at 12.3 million b/d – furthermore, this level has not been confirmed by so-called secondary sources ; the cut actually accepted by Riyadh would therefore be 3.8 million b/d. Conversely, current production in Russia is only 10.4 million b/d; the actual reduction in Russian production would therefore be only 1.9 million b/d. In reality, therefore, the reduction in OPEC+ production from the current level would amount to some 10.9 million b/d.
After the initial reduction of 10 million b/d planned for May and June, the OPEC countries have agreed to lower their production by 8 million b/d over the following six months (from July 1 to December 31, 2020), then by 6 million b/d over the following sixteen months (from January 1, 2021 until April 30, 2022), compared to the agreed baselines. “The agreement will be valid until 30 April 2022, however, the extension of this agreement will be reviewed during December 2021”, said the final OPEC+ statement. In addition, on June 10, 2020, OPEC+ will hold a video conference to “determine further actions, as needed to balance the market”.
The OPEC+ countries are hoping that other countries will join their effort to cut supply (Saudi Arabia’s Minister of Energy, Abdulaziz bin Salman, mentioned the United States, Canada and Brazil). “They will do it in their own way, using their own approaches, and it is not our job to dictate to others what they can do based on their national circumstances”, said the Saudi minister. The main question-mark is the United States of course. Donald Trump praised the OPEC+ deal, saying in his peculiar style that it was “a great day”. A senior Trump administration official welcomed the deal, saying: “These commitments would send an important signal that all major oil producing states will respond in an orderly manner to market realities caused by the Coronavirus pandemic”. According to the EIA, US oil output declined by 600,000 b/d during the week ending April 3, to 12.4 million b/d. The DoE agency is forecasting a fall of 2 million b/d until the first quarter of 2021. American officials worked hard to convince OPEC+ countries that although free market rules prevent them from telling companies what to produce, low prices prevailing on the market will be responsible for shifting the US oil supply towards lower levels.
Perhaps the most important aspect of the OPEC+ agreement is the duration of the planned reductions: two years, which is unprecedented. This can be explained by uncertainty about how long the pandemic will last, and how serious its impact on oil demand will be; and also, no doubt, by the fact that it was almost impossible for countries in this group to decree and apply a more massive reduction volume, i.e. 15 to 20 million b/d. Of course, no one expects all OPEC+ countries to faithfully meet their reduction commitments, let alone over such a long period. One may deduce that even if oil prices recover somewhat over the coming months, and after the end of the pandemic, they will not rise very much. The huge excess stocks that are piling up all over the world will burden prices for a long time to come. One is therefore justified in thinking that crude oil prices will remain moderate and that production of expensive oils (from sands and shale) will decline.