CAPE
TOWN, South Africa, April 10, 2020/ -- In a move to save the oil
industry — facing the
biggest crisis in its history — OPEC and Russia
have agreed on new production cuts, with the OPEC+ group agreeing to
eliminate 10 million barrels of crude per day for an initial two-month
period to save a glutted oil market. Mexico is the only country in the
extended OPEC+ group to have refused to take part in the cuts at the
same level as others — its energy minister Rocio Nahle proposed a
reduction in national output of 100,000 barrels per day instead of the
400,000 barrels per day requested.
Though the new OPEC+ deal is
not dependent on additional cuts from outside the group to move forward —
such as the United States, Brazil and Canada — OPEC+ is hoping for
additional cuts from these and other G20 countries.
The OPEC+
production cuts will begin in May but can only proceed if Mexico
participates. From July to December, overall production cuts will lower
to 8 million barrels per day, followed by 6 million barrels per day from
January 2021 to April 2022.
The fate of a new “OPEC++” deal, in
which additional countries could sign up to production cuts, will be the
focus of a virtual meeting of G20 energy ministers on Friday, with the
US Energy Secretary Dan Brouillette among the global energy leaders
expected to participate in the webinar. Alberta Energy Minister Sonya
Savage was on Thursday’s OPEC+ call, a first for Canada.
The
OPEC+ production cuts would just run through June 10, when OPEC+ is set
to meet again. Iran, Libya and Venezuela will be exempted. Saudi Arabia
and Russia would bear the brunt of the cuts.
Brent crude was down
4 percent at market close, losing pace from a nearly 11 percent rally
before the details of the deal were announced. Brent closed at $31.48
per barrel.
Free market or bust?
Thursday’s
deal would bring an end to the oil price war between Saudi Arabia and
Russia — which started March 8 in an effort to regain market share
captured by United States shale oil production in recent years. In
moving to end the oil price war, both Saudi Arabia and Russia have
called on the participation of global producers outside the OPEC+ group
to join production cuts.
That issue is set to be addressed at
Friday’s virtual G20 meeting, but the United States has balked at the
idea of officially joining cuts, citing an open market and anti-trust
laws. However, President Donald Trump has indicated the US — a top oil
producer along with Russia and Saudi Arabia — will naturally see sharp
declines in oil and gas production with the steep drop in oil prices and
drop in global demand. Trump has radically changed his position on
OPEC, as the oil market collapse foreshadows a collapse of US shale.
“Obviously
for many years I used to think OPEC was very unfair,” Trump told
reporters on Wednesday. “I hated OPEC. You want to know the truth? I
hated it. Because it was a fix. But somewhere along the line that broke
down and went the opposite way. … We have a tremendously powerful energy
industry in this country now — No. 1 in the world —and I don’t want
those jobs being lost.”
The US shale industry, however, remains
sharply divided on official production cuts — with majors like Exxon and
Chevron calling for a free market and smaller independents more eager
to join production cuts. In 2019, US oil production averaged 12 million
barrels per day. But production is now projected to fall by at least 15
percent in the second quarter of 2020 and another drop of 12 percent in
the third quarter, according to the EIA. Several companies in the
Permian Basin are asking for a hearing with the Texas Railroad
Commission, the regulator, to determine mandatory production cuts. As of
yet, no such meeting has been called.
Global pandemic coincides with price war
Oil
prices plummeted in recent weeks, as the oil price war between Russia
and Saudi Arabia, which began on March 8, was amplified by an
unprecedented drop in oil demand caused by the COVID-19 pandemic.
About
40 percent of the world’s population has been ordered to stay home to
stem the spread of COVID-19, according to the Energy Information Agency,
and unforeseen impacts on travel, tourism, manufacturing, and
joblessness have since seen global oil demand plummet by about 30
percent, from over 100 million barrels per day to under 85 million
barrels per day.
The virtual OPEC+ meeting, in fact, was an
indicator of the new reality, as many of the world’s top oil and gas
leaders joined the meeting from their home countries.
Brent crude
was averaging $55.70/barrel in February, before the oil price war and
the impacts of COVID-19 were known. Ahead of the meeting on Thursday,
Brent crude was trading at $33.41 and WTI at $25.92. Both Brent and WTI
have reached their lowest level in years, with Brent hitting $22.76 per
barrel in March, its lowest price since November 2002.
“The
global spread of the Coronavirus is creating a demand shock that is
impacting already fragile world energy market balances. Markets are
continuing to assess the yet unknown risks of COVID-19 to the global
economy as the disease continues to suppress economic activity,” said Dr
Sun Xiansheng, Secretary General International Energy Forum, in a
statement.
As demand for oil and the price of oil has declined,
storage capacity is reaching its limits. In just a few weeks, analysts
predict oil production may be shut in due to a lack of global storage
capacity.
“Low oil prices combined with the inelastic nature of
refined product supply and demand is usually a boon to refining margins.
However, COVID-19 also impacts downstream profitability caused by
erosion in demand. The combination of sustained shocks to supply and
demand will cause product inventories to rise to new highs,” Dr Sun
continued.
Impact on Africa
Africa has a
lot to lose from a sustained low oil price, in addition to the damaging
economic impacts of COVID-19. Economic powerhouses like Nigeria and
Angola, which reportedly had difficulty selling oil production
ear-marked for export in April, could take especially hard hits, made
especially vulnerable by a lack of economic diversification.
As a
whole, the continent’s oil producers have pushed for cooperation at the
OPEC+ meeting, urging for a stabilized oil market and reduction in
production.
In a joint statement, the Africa Petroleum Producers
Organization called for OPEC and non-OPEC members to cooperate in
stabilizing the oil market.
“We reiterate our support to OPEC and
non-OPEC member countries as well other global oil producers in their
concerted efforts at ensuring long term stability of the global oil
market. Furthermore, we urge the G20 countries to offer assistance to
Africa as we struggle to ward off this pandemic and price stabilization
process in the oil markets,” said H.E. Foumakoye Gado, President of the
Council of Ministers of APPO and the Minister of Petroleum of Niger.
H.E.
Timipre Marlin Sylva, the Minister of State for Petroleum Resources of
Nigeria, also urged for cooperation heading into Thursday’s meeting.
“The
driving force of our OPEC policy is first the stability of our national
economy as well as the stability of the global economy which is heavily
dependent on OPEC and its strategic partners, popularly referred to as
OPEC+. Nigeria, like the rest of the world, has been hit by the Global
Pandemic, COVID-19, and is prepared to join the rest of the world in
making the necessary sacrifices needed to stabilize the crude oil
market; and to prevent what is likely to be a major global economic
meltdown,” said Sylva.
NJ Ayuk, Executive Chairman of the African Energy Chamber, supported the deal and advocates for further cuts.
“The
OPEC deal is a good one. We can work with it for now. African countries
will not recover from COVID-19 and the associated economic difficulties
without a strong energy sector. The oil industry helped the continent
pull itself out of the last economic recession of 2008. African
businesses and workers will be happy to see the end to the price war and
to maintain an industry that meets their hopes and aspirations. A
global cut would be better and everyone needs to put some skin in the
game, especially our friends from the US, Canada and Norway.”
South Sudan, a member of the OPEC+ cooperation, backed the production cuts.
“South
Sudan believes that market volatility is negative for every player in
the market and hurts our ability to attract new foreign investment,
diversify our economy and promote peace,” stated Minister of Petroleum
Hon. Puot Kang. “South Sudan is focused on boosting exploration and
opening up new oil and gas fields, and the current scenario hampers our
growth targets significantly.”
The International Monetary Fund is
already working closely with African countries to stave off recessions
and an economic collapse. Governments throughout the continent are
calling for debt relief as the global economic crisis deepens. The World
Bank and the IMF have both expressed support for debt relief as less
developed economies navigate the COVID-19 fallout.
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