Can More Stability Be Expected Following the OPEC+ Deal?

Can More Stability Be Expected Following the OPEC+ Deal?

Doha, April 2020


Can More Stability Be Expected Following the OPEC+ Deal?


Oil is always viewed as the world’s most precious resource; nations have often battled over access to oil to maintain their security of supply and financial stability, however, the current global pandemic and subsequent slump in the price of oil is causing potential oil investors to question the profitability. Oil prices have dropped to an eighteen-year low, as oil cartels continue to share little revenue with ever-increasing oil stocks at their disposal.

Prior to the pandemic, regulators were already struggling to deal with falling oil prices, coupled with a crude tsunami, and then the COVID-19 outbreak swept market demand away. Mohammad Barkindo, OPEC Secretary-General, described the virus as an “unseen beast” that had created a “horrifying” supply and demand outlook for the industry “beyond anything we have ever seen before”.

To save further price slips and deteriorating conditions in the job market the United States urged oil producers to take countermeasures to stabilise this volatile market. Following pressure from US President Donald Trump, the two oil giants, Saudi Arabia and Russia, finally agreed with OPEC to resolve their feud over oil supplies. Ed Morse, Citi’s global head of commodities, referred to the end of the feud between the two giants as the two agreeing to take; “unprecedented measures for unprecedented times.”

After four days of talks, the powerful energy alliance OPEC+, led by Saudi Arabia and Russia (a non-OPEC member), along with their allies, proposed a deal to cut a massive 10 million barrels per day from supply, amounting to almost 10% of global production.

Mexico was initially the lone opposer to this record deal, until they reached a separate agreement with the United States, who gave Mexico some assurance to share their expected 250,000 bp/d production cuts with them. Norway, which is interestingly not a member of OPEC, OPEC+ or the G20, and represents around 2% of global oil output, also signaled willingness to cut its production.

The success of the deal was then reaffirmed by the US President in his subsequent tweet “The big Oil Deal with OPEC Plus is done. This will save hundreds of thousands of energy jobs in the United States. I would like to thank and congratulate President Putin of Russia and King Salman of Saudi Arabia. I just spoke to them from the Oval Office”. U.S. Energy Secretary Dan Brouillette added "Today's crisis transcends the interests of any one nation and requires a swift and decisive response from us all. Failure to act has far-reaching consequences to each of our economies."

Initially, oil producers will curtail crude oil output to 10 mb/d, starting on 1 May 2020, for a preliminary period of two months. For the next six months, the agreed crude oil production will be 7.7 mb/d. It will further be reduced to 5.8 mb/d for the next sixteen months. This does not include Saudi Arabia's 400,000 b/d additional voluntary cut.

As the historic deal was inked, oil benchmarks began to bounce back on the hope that the proposed cuts will bring some stability to the markets. However, gains were capped on concerns that the volume of cuts being discussed equates to just a fraction of the demand loss. Some analysts estimate that worldwide fuel consumption has reduced by almost 30 percent due to the global lockdown, aimed to slow down the spread of coronavirus. As much as 35 mb/d cuts are required to control supply going forward. Analyst for Oil Price Information Service, Tom Kloza, believed the cut to be “inadequate” to stabilise oil prices, even into the summer.

OPEC+ is also targeting G-20 countries in the hope to secure further commitments to 5 million barrels a day of production cuts from the G-20 members, in addition to the initial 10 million reduction in its output proposed in the agreement. Currently, these deep production cuts are seen as the only solution to the rapidly decaying demand and to avoid the crisis of oil storage.

OPEC and its allies, through this agreement, has certainly overshadowed its initial fragility during the period of the price war between the two oil giants. VP of Macro Oils at Wood Mackenzie, Ann-Louise Hittle, has optimistic views about the future with this agreement and implied that even a partial observation to the deal, would impact the market in a positive manner.

She added “the forces of supply and demand will eventually determine the future strategies required to achieve price equilibrium in this ever-evolving oil market”. “I think it is impressive that OPEC has got this far and persuaded countries like Iran and Iraq to agree,” said John Hall, Chairman of Alfa Energy Group in London.

But will the cuts be enough to throw a floor under prices as demand for energy spirals downwards? In view of current fundamentals and the consensus market perspectives, the countries and producers outside the OPEC+ group, such as Canada, Norway and Brazil, should strengthen this global agreement by affirming their commitments.

The group is expected to reconvene on 10th June to monitor the progress and determine if further actions are necessary. The success of the OPEC+ meeting signals a new dawn illustrated by good credibility and stronger alliance among producers. The OPEC+ meeting welcomed Argentina, Colombia, Ecuador, Egypt, Indonesia, Norway, Trinidad and Tobago and the International Energy Forum (IEF) as observers. “We have demonstrated that OPEC+ is up and alive,” Saudi Energy Minister Prince Abdulaziz bin Salman stated, adding that he was “more than happy with the deal.”

With a more certain future, OPEC+, member countries are also expecting early signs of some resumption in the industrial activities across the globe. China, the world’s largest oil consumer has reported a 10% increase in refiners’ output in April, as domestic demand in the country begins to increase. According to the German Chamber of Commerce in Beijing, Chinese operations may be back to normal by July 1, as the nation appears to have halted the spread of the virus.

“Transport fuel demand typically picks up in Asia and the Middle East during the month of Ramadan” said economist Mark Williams. “In the next four to eight weeks, economic indicators are expected to turn green in Asian and Middle Eastern regions.” For most parts of Europe and US, Economist also seem optimistic for the summer months and are anticipating a strong rebound later in the year.

These positive outlook projections by analysts, and world leaders coming together to broker a deal towards a more sustainable market, provides some optimism that some stability may result in the near future.