G20 held a meeting on April 10
in Saudi Arabia, chaired by Saudi
Crown Prince Bin Salman. Ahead
of this meeting, the Kremlin
announced that President Putin,
President Trump and Saudi King
Salman had discussed the OPEC+
meeting, saying they wanted the
restoration of stability to the oil
market.
The US and the G20 called on the
world’s leading countries to take
“all the necessary measures”
to stabilize an energy industry
devastated by the coronavirus
pandemic, giving international
backing to deep oil production
cuts pledged by OPEC and Russia.
OPEC and Russia struck a deal to
cut 10mb/d from global supply,
the biggest supply reduction ever
made as the producers moved to
prop up the global oil market.
Confirmation of the deal was
delayed by Mexico’s refusal to
make large cuts to its own oil
production, defying Saudi Arabia’s
push to have all countries in the
OPEC+ alliance cut an equal share.
The US, Russia and Saudi
Arabia, the world’s top three
oil producers, all endorsed the
agreement to cut production, with
President Trump saying that the
US would help Mexico “pick up
some of the slack” to smooth the
deal’s progress.
The communique from the G20
meeting said members would
“commit to take all the necessary
and immediate measures to
ensure energy market stability”.
With reference to the OPEC deal,
the communique “recognize[d] the
commitment of some producers
to stabilize energy markets”. An
earlier draft of the communique
had contained a pledge to do
“whatever it takes” but this was
removed in the final version.
Alexander Novak, Russian energy
minister, told the G20 meeting
that “the role of the G20 is to
comprehensively support these
efforts [undertaken by OPEC+]”.
9.7mb/d Output Cut
OPEC+ again met on April 12. The
participants reached agreement
this time. President Trump was
quick to thank OPEC+ for this
major agreement. After the
meeting, Zangeneh said: “Based
on this agreement, oil supply by
OPEC and non-OPEC states would
be cut by 10 mb/d during May and
June (the US would account for
300,000 b/d on behalf of Mexico).”
“According to earlier quotas,
Mexico was to cut 400,000 b/d
from its oil supply, but its energy
minister opposed. Talks were held
over these days and Mexico agreed
to cut 100,000 b/d from its output
in May and June. The US said it
would account for the rest,” said
Iran’s minister. Zangeneh said
G20 countries had also agreed to
cut 3.7 mb/d from their output for
one year, adding: “This agreement
is arranged by the International
Energy Agency (IEA). Saudi
Arabia, Kuwait and the United
Arab Emirates would voluntarily
cut 2 mb/d more than planned
from their supply.” Zangeneh said:
“Along with Libya and Venezuela,
Iran is exempt from any supply cut
due to sanctions.”
That was the end of a price war
triggered between Russia and
Saudi Arabia in March in the
shadow of Covid-19.
Market Reaction
The market’s immediate reaction
was positive to the OPEC+
agreement. One day after the
historic agreement, oil prices
grew 4% with North Sea Brent
reaching $32.77 and the West
Texas Intermediate crude traded
at $24.79.
Saudi Arabia’s energy minister
said his country along with Kuwait
and the UAE would cut more
than agreed from their output,
thereby bringing the totally agreed
reduction to 12.5 mb/d, much
more than the 9.7 mb/d agreed at
the OPEC+ meeting.
Some market players have cast
doubt on real reduction in oil
output by OPEC+. However, it
must be taken into consideration
that these producers saw a
price war when they failed to
agree on cutting 1.7 mb/d from
their production. Now with the
spread of Covid-19 and increased
lockdown all across the globe,
travels have decreased and the
global economy has contracted.
A number of refineries have also
come to a semi-halt.
Covid-19 brought oil producers to
the negotiating table so as not to
lose too big shares in the market
and instead stabilize prices.
What’s more is that in case the
Covid-19 pandemic continues
spreading the global economy
contracts further, global demand
for oil will fall again in which case
OPEC+ would have to gather anew
and agree on output cut in favor
of price balance. The US, Canada
and other big producers would
have no option but to cooperate
with OPEC+ if they want to avoid
economic meltdown and if they
want to save jobs. Maybe, never
has OPEC been as instrumental as
it is now in the oil market.Iran is
exempt from any reduction in cut
because of US sanctions. However,
it has not played down the
significant status of the country.
Iran holds the largest hydrocarbon
reserves in the world and despite
all US pressure to push it out of
the market, Iran is still present.
OPEC+ Cut Arrangement
The OPEC+ agreement provides
for cutting 9.7 mb/d for two
months starting May 1 and ending
June 30.
OPEC+ agreed to “adjust
downwards their overall crude
oil production by 9.7 mb/d,
starting on 1 May 2020, for an
initial period of two months
that concludes on 30 June 2020.
For the subsequent period of
6 months, from 1 July 2020 to
31 December 2020, the total
adjustment agreed will be 7.7
mb/d. It will be followed by a 5.8
mb/d adjustment for a period of
16 months, from 1 January 2021
to 30 April 2022. The baseline for
the calculation of the adjustments
is the oil production level of
October 2018, except for the
Kingdom of Saudi Arabia and the
Russian Federation, both with
the same baseline level of 11.0
mb/d. The agreement will be valid
until 30 April 2022, however, the
extension of this agreement will
be reviewed during December
2021.”
OPEC said signatory countries’
conformity with the Declaration of
Cooperation’s is to be monitored
considering crude oil production,
based on the data from secondary
sources, according to the
methodology applied for OPEC
member states.
The US and the
G20 called on
the
world’s lead-
ing countries to
take
“all the neces-
sary measures”
to stabilize an
energy industry
devastated by
the coronavirus
pandemic, giv-
ing international
backing to deep
oil production
cuts pledged
by OPEC and
Russia.
Saudi