The OPEC and its allies (OPEC+) agreed to extend the oil output cuts of the current 9.7 million barrels per day (bpd) by one more month, that is, till the end of July, according to OPEC delegates.
In a statement issued from its headquarters in Vienna, Austria, OPEC said the decision to extend the production cuts was agreed by all the parties during the 11th OPEC and non-OPEC Ministerial Meeting held via videoconference under the Chairmanship of Saudi Arabia’s Minister of Energy, Prince Abdul Aziz Bin Salman, and his Russian Federation counterpart, Alexander Novak, who is the co-Chair.
The communique states that any member that doesn’t implement 100% of its production cuts in May and June will make extra reductions from July to September to compensate for their failings.
Nigeria and Iraq, which in May reduced output by only half of their commitments, will also make up for their backlog of reductions with deeper cuts over the next three months, according to Nigeria’s oil minister, Timipre Sylva, and other OPEC delegates.
Meanwhile, the Ministry of Petroleum Resources, Nigeria, reported: “Nigeria reconfirms our commitment under the existing agreement; Subscribes to the concept of compensation by countries who are unable to attain full conformity (100%) in May and June to accommodate it in July, August and September.”
As economic pain ripples to the developing world, Nigeria’s dependence on oil puts its economy under severe threat. Nigeria produced about 120,000 barrels per day more than its agreed quota for May and June.
Apart from petroleum, Nigeria’s other natural resources include natural gas, tin, iron ore, coal, limestone, niobium, lead, zinc and arable land. The oil and gas sector accounts for about 10 per cent of gross domestic product, and petroleum exports revenue represents around 86 per cent of total exports revenue.
While crude prices started dropping in the first quarter due to the tension between some of the world’s biggest producers and the coronavirus outbreak, Nigeria ramped up production to compensate for the fall in income. Oil output rose to 2.07 million barrels a day, compared with 2 million in the fourth quarter and 1.99 million barrels in the Fund.For now at least, members of OPEC+ can enjoy the price gains resulting from their deal. Cuts are a victory for Saudi Arabia and Russia, who put a destructive price war behind them to successfully cajole Iraq, Nigeria and other laggards to fulfil their promises to cut production.
The backwardation
OPEC-Plus compliance with the May deal was 89%, meaning the group fell some 1.1 million barrels short of the target set in the April agreement, said commodities-data firm Kpler. Along with Iraq and Nigeria, Angola and Kazakhstan’s compliance efforts fell short, Kpler said.
Cutting production is always painful for oil-dependent states. Iraq in particular needs every penny because it’s still rebuilding its economy following decades of war, sanctions and insurgency.
The country made less than half of its assigned cutbacks last month, so compensating fully would require it to slash production by a further 24% to about 3.28 million barrels a day, according to Bloomberg calculations. Accepting such terms could risk a backlash from Iraqi parliamentarians and rival political parties for bowing to foreign pressure.
“We aren’t able to adjust our production more; we have already closed oil wells to make good out of the commitment we made,” Mexico President Andrés Manuel López Obrador said Saturday.
OPEC+ curbs could be undermined by a return of Libyan oil
The broader global effort to balance oil supplies faces immediate headwinds, as a handful of producers not subject to the OPEC-Plus restrictions begin boosting production.
In an immediate challenge to producers’ efforts to restrain oil output, Libya on Saturday restarted production at its largest oil field after a five-month shutdown, according to Libyan officials.
The civil war there halted more than 1 million barrels a day of production, helping OPEC+ rebalance the market, but a cease fire now opens the door for a gradual recovery of supply.
In January, allies of renegade commander Khalifa Haftarclosed oil facilities in a dispute with the central government, pushing output down to under 100,000 barrels a day from 1.3 million barrels a day. Mr. Haftar lost ground in a battle to take over Tripoli and earlier Saturday offered a cease-fire to an internationally recognized government that controls the capital.
Oil market “is still in a fragile state”
The deal will underpin the oil market recovery, easing the financial pain felt by resource-dependent emerging economies, shale explorers in Texas, and blue-chip companies like Royal Dutch Shell Plc.
The decision was highly anticipated and hence the move in oil prices already seems to be priced-in, both crude benchmarks rallies nearly 5% on Friday.
Oil has just posted a sixth weekly gain in London, more than doubling to $42.30 a barrel since April with traders anticipating tighter supplies as demand recovers from lockdown. U.S. President Donald Trump on Friday hailed the cuts from OPEC and its allies for saving America’s energy industry, and U.S. Energy Secretary Dan Brouillette welcomed the deal on Saturday.
West Texas Intermediate, the U.S. crude benchmark, added 5.7% to $39.55 a barrel Friday.
But analysts said the latest deal didn’t leave much maneuvering room to the cartel to boost prices. “The market has mostly priced this one-month extension scenario in,” said Bjørnar Tonhaugen, head of oil markets at consulting firm Rystad Energy. “So the upside to flat price is fairly limited if OPEC-Plus doesn’t have additional cards up its sleeve.”
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