OPEC+ extends output cuts in push to tighten oil market

OPEC, Russia, and other oil producers at a meeting last weekend agreed to extend their record oil production cuts of 9.7 million barrels per day by another month, which means that the cuts will now last until the end of July 2020. It is expected that these cuts will tighten the market further.

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The deal was initially set to expire on 30 June. The cuts, which make about 10 per cent of global output, will not only balance the global crude and condensate demand but are deep enough to create a monthly deficit starting from June 2020 and continuing uninterrupted until at least the end of next year, a Rystad Energy analysis shows.

OPEC+ had initially agreed back in mid-April that it would cut 9.7 million barrels of crude oil per day during May and June, in an effort to stabilize the oil market shaken by the oil price war between Saudi Arabia and Russia and the coronavirus pandemic.

Even after the OPEC+ deal, the last couple of months have been a rollercoaster ride, featuring oil demand destruction and the massive supply and demand imbalance with the West Texas Intermediate (WTI) crude prices going negative on 20 April for the first time in history, ending the day at close to minus $40/b. On the other hand, the Brent crude fell briefly below $20.

The market has somewhat recovered since then, especially in the last few weeks as some of the coronavirus restrictions were lifted.

Nevertheless, the effects of the coronavirus pandemic have widespread consequences and, according to World Bank forecasts, the global economy will shrink by 5.2 per cent this year.

That would represent the deepest recession since the Second World War, with the largest fraction of economies experiencing declines in per capita output since 1870, the World Bank says in its June 2020 Global Economic Prospects.

Back to the oil market, OPEC expects the global oil demand growth to drop by a staggering 9 mb/d this whole year, with the worst impact in the second quarter.

When it comes to the current oil price, at the time of writing, Brent crude stood at $40.3 per barrel and the U.S. WTI crude was $37.9 per barrel.

At the OPEC meeting last Saturday, held via videoconference, it was emphasized that the production adjustments in May, as well as the gradual relaxation of many of the lockdown measures as a result of the Covid-19 pandemic across the globe and an economic pick-up, had contributed to a cautious recovery and the return of more stability in the oil market.

Mohammad Sanusi Barkindo, OPEC Secretary General said: “Demand for the year is likely to be around 90.59 mb/d – taking us back to levels we saw before the 2014-2016 market downturn”.

In addition to the extension of the production cuts, it was also agreed at the meeting that the nations who were unable to reach full conformity in May and June would compensate with extra cuts in July, August, and September.

The meeting also called upon all major oil producers to contribute proportionally to the stabilization of the oil market.

However, Reuters reported on Monday that a trio of Gulf producers – Saudi Arabia, Kuwait, and the United Arab Emirates – would not continue an additional 1.18 million bpd in reductions.

It is also worth noting that Iraq has renewed its full commitment to the oil production adjustments decisions reached in April 2020 by OPEC Members Countries and non-OPEC oil-producing countries participating in the Declaration of Cooperation.

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According to Wood Mackenzie, the extension of oil output cuts will tighten the market further and could see Brent prices rise from the current $40/bbl toward $45-to-$50/bbl.

Ann-Louise Hittle, Wood Mackenzie vice president, Macro Oils, said: “The 9.7 million b/d production cuts were already working, extending them an extra month will tighten the market more quickly.

Hittle added: “Wood Mackenzie already expected the supply and demand balance to tighten in the third quarter. With the extension, this rebalancing will accelerate as the additional 2 million b/d is kept out of the market for longer. We project world oil demand to surpass global supply and global oil storage levels to begin to draw down in the third quarter, putting upward pressure on oil prices”.

She also said: “Demand is continuing to recover, with our forecast for the third quarter of this year seeing global oil demand 10 million b/d higher than it was in the second quarter, showing the recovery from Covid-19 lockdowns.

“However, while this recovery is remarkable, it still pegs demand 4 million b/d lower than the same quarter last year. This gives an indication of how quickly the fundamentals are changing – and just as OPEC+ decides to extend a nearly 10 million b/d production cut for another month”.

Earlier this month, the African Energy Chamber had called for an extension of the 9.7 million b/d production adjustment and urged all producing countries to ensure their conformity to the agreement.

Following the announcement of the extension, NJ Ayuk, Executive Chairman at the African Energy Chamber, said: “Uncertainty is bad for the oil industry and the extension of OPEC’s cuts ensures market stability”.

Commenting on the production cuts, Norwegian energy intelligence firm, Rystad Energy, said that the oversupply is a thing of the past as long as OPEC+ compliance stays strong and the oil demand recovery trajectory is not radically altered.

According to Rystad, the last surplus month appears to have been May when crude and condensate production exceeded demand by about 6.1 million barrels per day (bpd).

Rystad further noted that June is now already set for a global production deficit of about 1.5 million bpd. The imbalance is forecast to reach 4.6 million bpd in July, 4.2 million bpd in August and, after being reduced a little during the remainder of 2020, peak at 5.2 million bpd in January 2021, Rystad said.

Although the shortfall will ease after that, Rystad Energy estimates that monthly deficits will remain throughout next year.

Rystad Energy’s Head of Oil Markets, Bjørnar Tonhaugen, said: “We believe OPEC+ is attempting to create a mini-bull-cycle by quickly tightening the prompt market, helping depressed prices and creating a supply environment that will facilitate a rapid relief of oil storages, as deficits will trigger large stock draws”.

Rystad Energy estimates that global crude and condensate production will stay below 80 million bpd for all the remaining months of 2020. The output will likely reach 71.4 million bpd in June and grow monthly to a high of 78.4 million bpd in December.

Demand, on the other hand, is set to reach 72.9 million bpd already in June 2020 and exceed 80 million bpd from September onwards, reaching an annual monthly high of 82.3 million bpd in December.

An interesting fact at the end is that OPEC will be marking its 60th anniversary in September 2020 since its formation in Baghdad in 1960. 

Header photo by SP Mac – shared with permission of the photographer