OPEC+ finally signed off a landmark production cut deal on Sunday after adjusting a provisional agreement made last Thursday.
The 10th extraordinary OPEC and non-OPEC ministerial meeting on April 12, carried out via videoconference, agreed to cut overall crude oil production by 9.7 million barrels per day (MMbpd) from May 1 to June 30, then by 7.7MMbpd from July 1 to December 31 followed by 5.8MMbpd from January 1, 2021, to April 30, 2022.
The baseline for the calculation of the adjustments is the oil production of October 2018, except for the Kingdom of Saudi Arabia and the Russian Federation, which both have the same baseline level of 11MMbpd.
Late last week, the group agreed via videoconference at the 9th extraordinary meeting to adjust output by 10MMbpd from May 1 to June 30, then by 8MMbpd from July 1 to December 31 and 6MMbpd from January 1, 2021, to April 30, 2022. The group outlined, however, that those cuts were conditional on the consent of Mexico.
OPEC+ is next meeting on June 10 via videoconference “to determine further actions as needed to balance the market”. The extension of the latest agreement will be reviewed during December 2021.
Commenting on the final deal, IHS Markit Vice Chairman Daniel Yergin said it enables the global oil industry and the national economies and other industries that depend upon it to avoid a “very deep” crisis.
“Without this deal, the global industry would have run out of storage for the flood of excess oil in a few weeks and prices would have crashed, which would have also really hit financial markets,” he said in a statement sent to Rigzone.
“This restrains the build-up of inventories, which will reduce the pressure on prices when normality returns – whenever that is,” he added.
IHS Markit Vice President Roger Diwan outlined that the “historical” cut promises to remove up to 14MMbpd in May and June when paired with expected declines and shut-ins likely to occur in the next few months in the United States, Canada and some other producing countries.
“This is a critically-needed relief in the face of declines in crude demand estimated at around 20MMbpd,” Diwan stated.
“Stepping away from a destructive price war, the return to market management by Saudi Arabia and Russia and backed by the United States and a very involved President Trump, does mark a physical and psychological inflection point for the oil market,” he added.
Bjornar Tonhaugen, head of oil markets at Rystad Energy, dubbed the latest deal the “single largest output cut in history” but outlined that it was not big enough.
“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,” Tonhaugen said in a statement sent to Rigzone.
“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,” he added.
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