OPEC+ Extends Historic Production Cuts by Another Month
OPEC, in partnership with a group of non-OPEC oil producers led by Russia, has agreed to extend the previously announced production cuts for an additional month. The move, which extends the removal of around 10% of global supplies from the market, is likely to provide further support to prices that have already nearly doubled after touching multi-year lows last month.
On Monday, Brent crude prices crossed the US$43 per barrel (bbl) mark briefly before receding back to around US$41 / bbl, while U.S. WTI crude benchmark rose to over US$40 / bbl in intra-day trade. Both benchmarks hit their highest levels witnessed since the first week of March this year.
The initial agreement between the group of OPEC+ was to cut 9.7 million barrels per day (MMbbl/d) of global production for a period two months, and then to gradually raise production starting from July. However, as indicators suggest that the expected uptick in demand has been lower than previously projected despite the easing of government lockdown restrictions around the world, the producer group collectively agreed to extend the period of the agreement until the end of July.
Following the deal, Saudi Arabia, the world’s top exporter, sharply raised its monthly crude oil prices by US$5.6 to 7.3 / bbl for Asian buyers for the month of July. The country sells its crude at a differential to oil benchmarks, announcing every month the discount or premium it will charge the global refiners.
Despite agreeing to extend the cut, OPEC still faces the challenge of ensuring compliance from certain members to meet their pledged target cuts. Some member countries that failed to reach full conformity of their production cut quotas in May and June will have to accommodate their curbs in July, August, and September, in addition to the already agreed production adjustment for such months, OPEC said in a statement.
Nigeria and Iraq announced that they back the idea of compensating for their excessive outputs and agreed for the additional cuts in the coming months. However, it was unknown if Baghdad reached an agreement with the oil majors on curbing its output. Besides compliance, the potential return of Libyan output could also cause considerable challenges for OPEC. In southwestern Libya, two major oil fields have reopened after months of a blockade that resulted in the shutting down of most of the country’s oil production and exports.