The Organization of Oil Exporting Countries and its allies led by Russia reached a deal on Saturday to extend record oil production cuts through the end of July to keep buoying prices.
The grouping, known as OPEC+, is also implementing measures to crack down on cheats who fail to adhere to their allotted share of the curbs, with countries such as Nigeria and Iraq – which exceeded production quotas in May and June – compensating with extra cuts in July to September.
Oil prices have doubled in the past two months on the back of an OPEC+ deal reached in April that initially aimed to withdraw nearly 10 million barrels per day (bpd) – or 10 percent of global crude supplies – from the market during May and June, tapering 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 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.
Saudi Arabia, OPEC’s de facto leader, and Russia have to perform a balancing act of pushing up oil prices to meet their budget needs while not driving them much above $50 a barrel to avoid encouraging a resurgence of rival US shale production.
Too much supply
The April OPEC+ deal was agreed following intense pressure from US President Donald Trump, who is facing re-election this year and has pledged to protect the US oil patch. Many US firms borrowed heavily to drill new wells when oil prices were high, placing them at risk of bankruptcy when US crude prices turned negative in April.
Trump, who was under pressure from some Congressional lawmakers to pull US troops out of Saudi Arabia if Riyadh did not act to curb oil output, spoke to the Russian and Saudi leaders before Saturday’s talks, saying he was happy with the price recovery.
“As President Trump faces a re-election vote in November, he could well end up calling for a production increase from the OPEC+ partners, in contrast to the steep reductions he personally sought in early April when the oil demand collapse was at its worst,” said Ann-Louise Hittle from Wood Mackenzie.
While oil prices have partially recovered, they are still well below the costs of most US shale producers. Shutdowns, layoffs and cost-cutting continue across the US.
As global lockdown restrictions to halt the spread of the coronavirus are being eased, oil demand is expected to exceed supply sometime in July but OPEC has yet to clear 1 billion barrels of excess oil inventories accumulated since March.
Tonhaugen said Saturday’s decisions would help OPEC reduce inventories at a rate of 3-4 million bpd over July-August.
“The quicker stocks fall, the higher prices will get. And that is crucial for many OPEC+ economies, whose fiscal budgets count on oil sales,” he said.
Nigeria’s petroleum ministry said Abuja backed the idea of compensating for its excessive output in May and June.
Iraq, with one of the worst compliance rates in May, agreed to extra cuts although it was not clear how Baghdad would reach an agreement with oil majors on curbing Iraqi output.
Iraq produced 520,000 bpd above its quota in May, while overproduction by Nigeria was 120,000 bpd, Angola’s was 130,000 bpd, Kazakhstan’s was 180,000 bpd and Russia’s was 100,000 bpd, according to OPEC+ data.
OPEC+’s joint ministerial monitoring committee, known as the JMMC, is now set to meet every month until December to review the market, compliance and recommend levels of cuts.
The next JMMC meeting is scheduled for June 18, while the next full OPEC and OPEC+ meeting is set to take place on November 30-December 1.