The decision last weekend of OPEC, Russia and allies to extend the deepest cut in oil production till the end of July is expected to have a positive impact on the global oil prices. Since the cuts were imposed bout two months ago, the global price of crude has increased by almost two folds as the cuts withdrew about 10 per cent of global supply of oil.
Some oil producing countries such as Nigeria and Iraq had produced more than they were supposed to in May and June and the group, known as OPEC+, has not demanded that such countries compensate by increasing production cuts the between July and September.
Back in April, an initial agreement by the OPEC+ has meant that it would reduce supply by 9.7 million barrels per day (bpd) during May-June with the aim of shoring up prices that had slumped because of the slump in demand due to the novel coronavirus pandemic. 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.
“Prices can be expected to be strong from Monday, keeping their $40 plus levels,” said Bjornar Tonhaugen from Rystad Energy.
For some of the largest oil producers such as Saudi Arabia, the de facto leader of OPEC, and Russia, this was a delicate balancing act as the countries tried to prop up oil prices by reducing production and consequently supply to the global oil market and yet manage their oil dependent economies. At the same time, the group had to ensure that the price was not propped up over the $50 a barrel mark so as not to encourage shale producers of the United States to produce more oil and consequently flood the market with excess oil, which again could bring down prices.
According to reports, whether the self imposed additional, voluntary cuts of 1.18 million bpd would be extended beyond June by oil majors like Saudi Arabia, the United Arab Emirates and Kuwait.
According to reports, the agreement by OPEC+ in April to cut production was taken under pressure from the US President Donald Trump who aims to safeguard the oil industry in his country.
Even though the global oil prices have recovered to an extent, the current prices are well below the cost of production of oil for most US shale producers, many of whom have already resorted to shutdowns, layoffs and cost cutting all across the United States.
“I applaud OPEC-plus for reaching an important agreement today which comes at a pivotal time as oil demand continues to recover and economies reopen around the world,” U.S. Energy Secretary Dan Brouillette wrote on Twitter after the extension.
(Adapted from Reuters.com)