Oil output cuts extended until end-July

OPEC+ has agreed to extend deepened oil output cuts designed to prop up prices collapsed due to the coronavirus crisis. However, too high prices will play into hands of US shale producers, so the coalition is trying to avoid price levels much above $50 per barrel.

OPEC, Russia and allies agreed on Saturday to extend record oil production cuts until the end of July, reports Reuters. The coalition’s initial agreement reached in April envisaged joint supply cuts of 9,7 million bpd during May-June, which were supposed to taper to 7,7 million bpd from July to December. The deal has helped to withdraw almost 10% of global supplies from the market and double oil prices in the past two months.

“Demand is returning, as big oil-consuming economies emerge from pandemic lockdown. But we are not out of the woods yet, and challenges ahead remain,” Saudi Minister of Energy Abdulaziz bin Salman Al Saud told OPEC+ ministers at a video conference.

OPEC’s kingpin Saudi Arabia and Russia aim to push oil prices up to meet their budget needs but not let them soar much above $50 per barrel, as it may encourage a resurgence of rival US shale production. The current price level is still well below the costs of most US shale producers prompting shutdowns, layoffs and cost-cutting across the country. “I applaud OPEC-plus for reaching an important agreement today which comes at a pivotal time as oil demand continues to recover and economies reopen around the world,” commented US Secretary of Energy Dan Brouillette on Twitter after the extension.

OPEC+ also demanded countries that exceeded production quotas in May and June compensate with extra cuts in July-September. Iraq, which produced 520,000 bpd above its quota in May, agreed to extra cuts. The Federal Ministry of Petroleum Resources of Nigeria also confirmed that Abuja backed the idea of compensating for its excessive output. In May, Nigeria’s overproduction amounted to 120,000 bpd, Angola’s was 130,000 bpd, Kazakhstan’s was 180,000 bpd and Russia’s was 100,000 bpd, according to OPEC+ data.

Oil demand is expected to exceed supply in July, but OPEC has accumulated 1 billion barrels of excess oil inventories since March. According to Bjørnar Tonhaugen from Rystad Energy, the latest extension is likely to help OPEC reduce its inventories at a rate of 3-4 million bpd in July-August. “The quicker stocks fall, the higher prices will get,” he said.

On Friday, Brent crude climbed above $42 per barrel, which is a three-month high. Tonhaugen expects prices to keep $40-plus levels. However, after April’s nosedive oil prices still remain by a third lower than at the end of 2019. OPEC+’s Joint Ministerial Monitoring Committee will meet monthly until the coalition’s next scheduled meeting on 30 November — 1 December to review the market, compliance and recommend levels of cuts.

By Anna Litvina