Ministers from the Organization of the Petroleum Exporting Countries and allies such as Russia (OPEC+) agreed in a video conference July 15 to ease production cuts in August as scheduled, saying that as the economies take steps to reopen, demand for oil is growing. If additional lockdown measures to contain the spread of COVID-19 occurred, further reducing the demand for oil, they said, the decision could be reconsidered in an emergency meeting.
Since May, OPEC+ has been reducing output by 9.7 million b/d, accounting for 10% of global supply. Starting in August, production cuts will be officially reduced to 7.7 million b/d until December.
However, Prince Abdulaziz bin Salman, Saudi Arabia's Minister of Energy, said that effective containment measures would go deeper, as countries which overproduced from May to June will make additional cuts in August and September to make up. Thus, the final total output cut is about 8.1-8.3 million b/d.
“We should not be complacent,” said Abdelmadjid Attar, Algeria’s Minister of Energy, during the meeting. “Oil market balance is progressively improving...But risks and uncertainties are huge, be they related to the pandemic or to the economic consequences.”
“Oil demand has bounced back from the lows that saw daily drops of more than 20 million b/d in April, but it is still expected to witness an annual drop of 8.9 million b/d for the whole of 2020,” said Mohammad Sanusi Barkindo, secretary general of OPEC, during the meeting. “Given considerable uncertainties, the expected rebound in 2021 will be short of covering the lost demand this year and will not reach pre-crisis levels of 100 million b/d soon.”
Regarding the latest OPEC+ meeting, Paola Rodriguez-Masiu, senior oil markets analyst at Rystad Energy, said nobody could really expect OPEC+ to keep the 9.7 million b/d curtailments into August.
"Boosting output by 2 million b/d is not little, but the demand recovery, even though a little slower than expected, justifies it. However, even as OPEC+ increases production by about 2 million b/d, we see crude balances displaying a prolonged period of deficits for the rest of 2020…Developments (of COVID-19) there could determine the direction of future OPEC+ meetings and how they may react to a second wave of the pandemic.”
“OPEC+ registered compliance of 89% during July 2020, translating into an 8.6 million b/d cut (out of the 9.7 million b/d target). Although laggards are set to deepen cuts for August and September to ‘made up’ for falling short their past target, we find unlikely that they will be able to achieve 100% of compliance.”
“In the case of Iraq, we believe that the target set to compensate the alliance is overambitious given Iraq’s dire economic need for oil revenues right now. Getting the country’s production below 4 million b/d will be an uphill battle. In that sense, we find that expected deeper cuts from laggards will have a limited impact on the total cuts,” Rodriguez-Masiu said.
“We see the increase in OPEC+ production boosting crude exports from August onwards as the alliance gradually reopens the oil taps. UAE’s ADNOC has already announced plans to raise its crude exports by as much as 300,000 b/d next month. Despite the rise in exports, we expect prices to remain static as an increase in crude processed by refineries is likely to offset higher supply volumes…We find that prices will have to stay where they are for the rest of 2020 as any uptick will hurt already struggling refining margins and negatively impact the most-needed recovery in refinery runs.”