The Organization of the Petroleum Exporting Countries (OPEC) and allied nations agreed Saturday to extend a production cut of nearly 10 million barrels of oil per day (bpd) through the end of July, hoping to encourage stability in energy markets hard-hit by the coronavirus-induced global economic crisis.
Ministers of the cartel and outside nations led by Russia met via video conference to adopt the measure, aimed at cutting the excess production depressing prices as global aviation remains largely grounded due to the pandemic. The curbed output represents some 10% of overall global supply.
But Mexico, which had already made clear ahead of the talks that it "could not adjust ... production further," announced that it would not be complying.
OPEC+ had initially agreed in April that it would cut supply by 9.7 million bpd during May-June to prop up prices that collapsed due to the coronavirus crisis. Those cuts were due to taper to 7.7 million bpd from July to December.
"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 Energy Minister Prince Abdulaziz bin Salman told the video conference of OPEC+ ministers.
Benchmark Brent crude LCOc1 climbed to a three-month high on Friday above $42 a barrel, after diving below $20 in April. Prices still remain a third lower than at the end of 2019.
"Prices can be expected to be strong from Monday, keeping their $40 plus levels," said Bjornar Tonhaugen from Rystad Energy.
Danger still lurks for the market, even as several nations ease virus-related lockdowns, and enforcing compliance remains thorny.
Algerian Oil Minister Mohamed Arkab, the current OPEC president, warned meeting attendees that the global oil inventory would soar to 1.5 billion barrels by the mid-point of this year.
"Despite the progress to date, we cannot afford to rest on our laurels," Arkab said. "The challenges we face remain daunting."
That was a message echoed by Saudi Oil Minister Abdulaziz bin Salman, who acknowledged "we all have made sacrifices to make it where we are today." He said he remained shocked by the day in April when U.S. oil futures plunged below zero. "There are encouraging signs we are over the worst," he said.
Russian Energy Minister Alexander Novak similarly called April "the worst month in history" for the global oil market.
The decision came in a unanimous vote, United Arab Emirates (UAE) Energy Minister Suhail al-Mazrouei wrote on Twitter. He called it "a courageous decision."
But it is only a one-month extension of a production cut that was deep enough "to keep prices from going so low that it creates global financial risk but not enough to make prices very high, which would be a burden to consumers in a recessionary time," said Amy Myers Jaffe, a senior fellow at the Council for Foreign Relations.
"There is so much uncertainty that I think they took a conservative approach," she said. "You don’t know how much production is going to come back on. You don’t know what’s going to happen with demand. You don’t know if there’s going to be a second (pandemic) wave."
Jaffe said improved oil demand in China and Asia and a gradual stabilization of demand in the U.S. and to some extent, Europe, where there's some cautious economic reopening, were encouraging for producers.
A bone of contention ahead of the meeting had been the willingness of each country to abide by the agreed production quotas.
According to data intelligence company Kpler, OPEC+ reduced output by around 8.6 million bpd in May, less than planned, with Iraq and Nigeria seen as the most resistant.
OPEC said all meeting participants agreed Saturday that countries that failed to comply fully so far were willing to make up for it in July, August and September.
Nevertheless, it was precisely that earlier failure that led Mexico on Saturday to refuse to extend its cuts.
"There are other countries that extended the cuts to July. We told them no, that we are maintaining the agreement signed in April. There is no problem," Mexico's Energy Minister Rocio Nahle told reporters during a visit to a petrochemical plant in Veracruz state.
She said Mexico "fully respected" the original agreement, under which it agreed to cut production by 100,000 barrels a day in May and June, but other countries "did not respect it," without specifying which ones.
Mexican President Andres Manuel Lopez Obrador, who has vowed to ramp up the country’s crude oil production, said Friday that Mexico was not in a position to make additional cuts on top of what it had agreed in April.
Under the deal in April, Mexico pledged to reduce its crude output by 100,000 bpd in May and June, after resisting pressure from other oil producers to make cuts of 400,000 bpd.
Mexico’s unwillingness to go as far as other OPEC+ countries in making output cuts caused friction with Saudi Arabia in April. An agreement was reached after Mexico said the U.S. would help make up the difference.
OPEC has 13 member states and is largely dominated by oil-rich Saudi Arabia. The additional countries involved part in the so-called OPEC+ accord has been led by Russia and Mexico under Obrador.
Earlier this year, when demand was down, Saudi Arabia was flooding the market with crude oil, helping to send prices down to record lows. That prompted the U.S. government in April to take the unusual step of getting involved in OPEC’s negotiations, pressuring members of the cartel to agree to cuts to help end the oil price free-fall.
At the time, President Donald Trump said the U.S. would help take on some of the cuts that Mexico was unwilling to make. And perhaps more importantly, a group of U.S. senators upset over the impact on U.S. shale production said at the time that they had drafted legislation which would remove American forces, including Patriot Missile batteries, from Saudi Arabia.
In a rambling Rose Garden speech Friday, Trump took credit for the April deal. "People said that wasn’t possible but we got Saudi Arabia, Russia and others to cut back substantially," he said. "We appreciate that very much."
U.S. Energy Secretary Dan Brouillette tweeted his applause Saturday for the extension, which he said comes "at a pivotal time as oil demand continues to recover and economies reopen around the world."
However, some countries have been producing beyond quotas set by the deal. One was Iraq, which remains decimated after a years-long war against the Islamic State group. Iraq Oil Ministry spokesman Assem Jihad said in a statement that Baghdad had "renewed its full commitment" to the OPEC+ deal.
Analysts had expected only a one-month extension given the still fluctuating level of demand.
"If the demand is great, countries like Russia will want to produce more oil, so they probably won’t want to get locked into a longer-term deal that may not help them," said Jacques Rousseau, managing director at Clearview Energy Partners.
In a research note, Clearview also said Saturday that the producer's group "appears to be going to great lengths to keep the deal together despite unequal compliance" – trying to avoid public fights on the issue.
"That solution might work today, but not repeatedly," it said, citing reports of rising Libyan output and the end of production cuts from Mexico that will heighten the need for compliance.
Major production cuts are simply untenable for countries such as Iraq, Oman and Ecuador, whose economies depend nearly exclusively on petroleum income, as they could face debt default.
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