OPEC+ Extends Deal to Shore Up Prices
OPEC and allies agreed in their June 6 meeting to extend a recently-reached deal on cutting their production to help boost prices that have suffered due to falling demand following the coronavirus outbreak.
The statement comes shortly after OPEC and non-OPEC allies, known as OPEC+, agreed to extend their deepest round of production cuts in history to take roughly 10% of oil supplies off the market through to the end of next month.
Oil prices have surged since some of the world’s most powerful oil producers brought in a production cut of 9.7 mb/d starting on May 1. The move was designed to prop up prices at a time when the coronavirus pandemic had led to an unprecedented demand shock in energy markets.
The output cuts from OPEC+ were initially scheduled to be scaled back to 7.7 mb/d from July 1 through to the end of the year
But the new deal means the group will now cut 9.6 mb/d through to the end of July. The figure is 100,000 b/d lower than the previous agreement because Mexico said it remained committed to the terms of the original deal and subsequent reduction in cuts.
Iran’s Minister of Petroleum Bijan Zangeneh after the OPEC ministerial meeting said that balance would be restored to the oil market once the entire global economy would recover.
Zangeneh said oil producers that had not complied with the previous OPEC+ production cut had promised to compensate for their non-compliance in coming months so that “the supply glut in the market would be reduced and prices would recover”.
He said Brent prices’ growth to above $40 a barrel showed that OPEC had made proper decisions.
“In the long-term, as far as the global economy does not recover and the world does not get rid of negative economic growth, demand for oil will not increase and oil prices will not be balanced. But so far OPEC+ agenda has been correct,” he added.
Covid-19 Specter
The 179th OPEC ministerial meeting and the 11th OPEC+ meeting were held through videoconference due to the specter of the coronavirus outbreak. The global economy has shrunk and demand for oil has declined due to Covid-19. Various nations are easing down their lockdown, but the market remains oversupplied.
Based on the 179th ministerial meeting’s remarks, the global economy is set to contract 3.4%. Major economies like the US, Japan and Britain would see their economy contract and only China would experience positive growth.
Economic shrinkage tells oil producers that demand for oil is falling. Demand for oil was down 9 mb/d in the first quarter of the current calendar year compared with the previous quarter, causing worries among investors in the petroleum industry. OPEC’s estimates show that capital expenditure would decline 23% in 2020.
In the OPEC+ emergency meeting in April, oil producers agreed to remove 9.7 mb/d from their production. Iran and Venezuela, due to US sanctions, and Libya, due to domestic crisis, were exempt from any output cut.
But Mexico, whose share in the cut was 100,000 b/d, said it would no longer cut this amount from its production.
In their Declaration of Cooperation signed in April, the 23 OPEC+ countries had agreed to cut 9.7 mb/d from their output in May and June, 7.7 m/d for the next six months and then 5.8 mb/d for 16 months.
Iraq, Nigeria, Kazakhstan and Angola were reported to have not complied with May’s production cut.
Non-Compliance
Iran’s Zangeneh said the countries that had not respected their production cuts would compensate in the coming three months in order to help prices recover.
He said that non-OPEC would account for 40% of production cuts with Russia holding a 10% share.
The International Energy Agency estimated that roughly 25% of demand was drained from the market in April as confinement measures brought mobility to a near standstill for billions of people across the globe.
Two days after the OPEC+ meeting, Saudi Arabia and Russia said the success of the energy alliance’s latest production cuts relies on all members complying with the terms of the deal.
“We have no room whatsoever for lack of conformity,” Saudi Energy Minister Prince Abdulaziz bin Salman said during an online press conference.
Those that failed to conform to the OPEC+ deal in May and June should compensate with extra cuts from July through to September, Prince Abdulaziz said.
Russian Energy Minister Alexander Novak said via an interpreter that he fully agreed with his Saudi counterpart. “I can say that overall conformity levels are extremely high, considering the magnitude of the cuts and how bad the situation is.”
“We have spent a lot of time discussing full conformity and how this will be compensated because the success of the deal and the success of our efforts rest on all countries doing their part,” he added.
Compliance Mechanism
Zangeneh said OPEC and non-OPEC oil producers had 90% compliance with the deal.
He said that market price was the only factor forcing member states to remain committed to their obligations.
“Oil prices, market performance and reactions are the only mechanism for OPEC and OPEC+ in implementing their decisions,” he added.
Spokesperson of Iraq’s Ministry of Oil, Assem Jihad, said in a statement, “Despite the economic and financial circumstances that Iraq is facing, the country remains committed to the agreement.”
The spokesperson emphasized that Iraq had remained strong advocate over the years of all efforts that help in restoring stability and balance to the oil market.
Nigeria’s petroleum ministry said Abuja backed the idea of compensating for its excessive output in May and June.
Iraq produced 520,000 b/d above its quota in May, while overproduction by Nigeria was 120,000 b/d, Angola’s was 130,000 b/d, Kazakhstan’s was 180,000 b/d and that of Russia was 100,000 b/d, OPEC+ data showed.
The OPEC+ joint ministerial monitoring committee, known as the JMMC, will meet monthly until December to monitor the market, compliance and recommend levels of cuts. JMMC’s upcoming meeting is scheduled for 18 June.
Prince Abdulaziz bin Salman told the videoconference of OPEC+ ministers that confidence would be restored to market through active commitment.
He said: “Demand is returning as major oil-consuming economies overcome pandemic lockdown. But we are not out of the woods yet and challenges ahead remain.”
Novak said the oil market remained fragile, adding that the gradual end of lockdowns and subsequent economic overture was helping improve demand for crude oil.
Iran New OPEC Governor
Amir-Hossein Zamaninia, Iran's deputy petroleum minister for international affairs and commerce, was appointed Iran's governor for OPEC, replacing the recently deceased Hossein Kazempour Ardebili.
The appointment was signed off by 13 OPEC ministers during the 179th meeting of the OPEC videoconference held on June 6. OPEC governor serves as a member country's top envoy to the organization's secretariat.
Zamaninia holds a law degree from the US and has been involved in Iran’s nuclear negotiations with world powers for years under Foreign Minister Javad Zarif.
Kazempour who was Zangeneh's right hand in OPEC died May 16 of a brain hemorrhage, leaving major shoes to fill at a critical time