The Organization of the Petroleum Exporting Countries and other oil-producing countries including Russia reached an agreement on Thursday’s [Apr. 9] teleconference to cut production by 10 million b/d in May and June. The cuts amount to 10% of total crude supply.
Saudi Arabia agreed to cut 3.3 million b/d from its output and Russia will cut 2 million b/d from its daily production. Further cuts could come from a meeting of the Group of 20 nations on Apr. 10.
The cut was agreed by all OPEC and non-OPEC oil producing countries participating in the Declaration of Cooperation, with the exception of Mexico, and as a result, the agreement is conditional on the consent of Mexico.
On the agreement, Wood Mackenzie's Ann-Louise Hittle said: “A 10 million b/d cut would be very supportive of price over the second quarter. Even a 5 million 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.”
“A 10 million 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," she added.
The American Petroleum Institute issued a statement regarding the OPEC+ decision.
"Following strong US diplomacy and reduced domestic production driven by market conditions, we welcome today’s OPEC+ decision for government-owned oil companies to cut production by 10 million b/d for a 2-month period," said Mike Sommers, API president and chief executive officer. "While this move will help stabilize world oil markets, significant challenges remain throughout the supply chain since current market disruptions are driven largely by this historic drop in demand as a result of the COVID-19 pandemic. The best thing for the energy industry – and the entire US economy – is to slow the spread of COVID-19 and stimulate the economy until demand stabilizes and it’s safe for Americans to return to work."
Despite the agreement, one should not be overly optimistic, said Rystad Energy.
"The proposed 10 million b/d cut by OPEC+ for May and June 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. Just hours before delegates stepped into the (again virtual) closed meeting, Brent was fluttering in the mid-$30s, seemingly oblivious to the fact that even if a 10 million b/d cut is agreed upon, or even in the best-case scenario 15 million b/d if the US, Canada, Norway, and Brazil join forces, an excess of supply of the magnitude of 5-10 million b/d will remain, and will need to be stored."
Rystad Energy currently estimates that the demand-supply imbalance for April is 27.4 million b/d, an amount physically impossible for the oil market to absorb.
