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OPEC+ cuts won’t match massive reduction in oil demand

Oil&Gas Materials 13 April 2020 10:11 (UTC +04:00)
OPEC+ cuts won’t match massive reduction in oil demand

BAKU, Azerbaijan, April 13

By Leman Zeynalova - Trend:

OPEC+ cuts won’t match massive reduction in oil demand, Charles Ellinas, CEO of Cyprus-based energy consultancy e-CNHC told Trend.

“First, with market forces leading to reductions in US shale oil production, Canadian oil sands, etc, the 15 million b/d will be achieved anyway. I had no expectation that OPEC+ cuts could match the massive reduction in oil demand. The key benefit is that it will avert a total collapse in the oil price - which, once global storage capacity becomes fully used, could have gone down to $10/b - and avoid an absolute mayhem in the oil industry. In the short term oil prices will stay low, but as Covid-19 recedes and the global economy starts recovering, this deal will shore-up prices,” he said.

Ellinas noted that it will be a challenge, but oil market forces will bring production down, especially where break-even costs are above $30-40/b.

“It will in the longer term, more likely in 2021, once Covid-19 recedes and the global economy starts recovering. The fact that the deal provides for 6 million b/d production cuts between January 2021 and April 2022, it will act as a floor to future oil production - providing future certainty -which will help,” said the expert.

He pointed out that there is a long way to go for that as the new deal expires in April 2022.

“Hopefully by then the global economy will recover and some degree of normality will return. But, in any case, it will take longer for the oil and gas industries to recover, and by then they will be different - with more consolidation. The key issue is to keep costs low and prices low to ensure continued competitiveness against other energy resources. That means that expensive to develop oil and gas fields will be left behind as companies concentrate on large, easy to develop, low risk and highly profitable projects,” said the expert.

Edward C. Chow, Senior Associate, Energy and National Security Program, Center for Strategic and International Studies, noted that Saudi Arabia and Russia badly miscalculated when they started their war over market share early March, when the severity of the coronavirus crisis and its impact on the global economy and oil demand were not yet clear.

“As a result, they caused oil price to drop precipitously, much more than it would have.

The OPEC+ agreement was very vague and virtually unenforceable. Consequently it had negative impact on market sentiment. The G20 statement was even more meaningless. I expect Brent oil price to stay in a narrow trading range around $30 per barrel until there is economic recovery and to stay at a relatively low level until the strength of the global recovery is known,” he said.

The 10th (Extraordinary) OPEC and non-OPEC Ministerial Meeting held via videoconference, 12 April 2020 decided to adjust downwards the 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 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.

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