Among the consequences of the coronavirus’ outbreak, oil prices fell dramatically, urging the Organisation of the Petroleum Exporting Countries (OPEC) and its allies to call for an extraordinary ministerial meeting. The agreement reached by its members could lift the burden on the exploration and production (E&P) companies, but it could not be enough to restore the market balance.
“The COVID-19 pandemic has proliferated around the world, slowly and steadily paralysing the global economy,” said His Excellency Mohamed Arkab, Algeria’s Minister of Energy and President of the OPEC Conference, during his welcome note. “[…] The impact on the oil market is also unprecedented. Large-scale oil demand destruction, and the resulting massive supply and demand imbalance, have the potential to fill global storage capacity quickly and force production shutdowns. The adverse impact on oil exporting country revenues is huge, at a time when these countries are facing the human tragedy of the pandemic and the resulting economic downturn.”
During the meeting, the oil producing countries reaffirmed their continued commitment in the declaration of cooperation, which aims to achieve and sustain a stable oil market; the mutual interest of producing nations; the efficient, economic, and secure supply to consumers; and a fair return on invested capital.
The participants agreed to adjust downwards their overall crude oil production by 10 million barrels per day (bpd), starting on 1 May 2020, for an initial period of two months.
“The proposed 10 million bpd cut by OPEC+ for May and June will keep the world from physically testing the limits of storage capacity and save prices from falling into a deep abyss, but it will still not restore the desired market balance,” commented the oil markets team of the independent energy consulting firm Rystad Energy.
Rystad Energy noted that even if a 10 million bpd cut is agreed upon, an excess of supply of the magnitude of 5-10 million bpd will remain and will need to be stored.
For the subsequent period of six months, from 1 July 2020 to 31 December 2020, the participants to the OPEC+ meeting agreed on a total adjustment of 8 million bpd. It will be followed by a 6 million bpd adjustment for a period of 16 months, from 1 January 2021 to 30 April 2022.
“The supply cut will give demand time to improve as quarantines in parts of Europe are partially lifted, but more importantly, it gives E&P companies more time to prepare supply chains and activity plans, reduce costs and avoid an uncontrolled dismantling of parts of the industry,” continued Rystad Energy’s team.
The importance of giving companies enough time to prepare was also underlined by Anita Orban, vice president for International Affairs at Tellurian LNG.
“The challenge today is not to stabilise the oil prices at a much higher level for the second quarter,” she wrote in an opinion editorial for CEENERGYNEWS. “It is to prevent prices from falling even lower and avoid costly and damaging shutdowns once storages are full and the market cannot absorb more oil. Shutdowns are much more costly than a decreased production is as certain oil fields could be permanently damaged if the ramp down is not scheduled carefully. The aim should really be to flatten the curve of prices so that companies have enough time to prepare.”
The baseline for the calculation of the adjustments is the oil production of October 2018, except for Saudi Arabia and Russia, both with the same baseline level of 11 million bpd. The agreement will be valid until 30 April 2022 but an extension can be reviewed during December 2021. Furthermore, OPEC+ members are also calling upon all major producers to contribute to the efforts aimed at stabilising the market.
However, it has to be underlined that all those measures were agreed by all the OPEC and non-OPEC oil producing countries except for Mexico, and as a result, the agreement is conditional on the consent of Mexico.
Photo: OPEC’s official Facebook page.