OPEC, Russia and their allies agreed on Saturday to extend record cuts in oil production until the end of July, extending a deal that has helped crude prices double in the past two months by withdrawing nearly 10% of global market supplies. The group, known as OPEC +, also demanded that countries like Nigeria and Iraq, which exceeded production quotas in May and June, to compensate with further cuts from July to September. OPEC + initially agreed in April that it would cut supply by 9.7 million barrels per day (bpd) in May-June to support prices which have collapsed due to the coronavirus crisis. These reductions were to be reduced to 7.7 million bpd from July to December.
“Demand is returning as major oil-consuming economies emerge from pandemic lockdown. But we are not out of the woods yet and the challenges ahead remain,” Saudi Energy Minister Prince Abdulaziz bin said. Salman, during the OPEC + ministers’ videoconference.
Benchmark Brent crude hit a three-month high above $ 42 a barrel on Friday, after dipping below $ 20 in April. Prices are still a third lower than at the end of 2019.
“We can expect prices to be strong from Monday, keeping their levels above $ 40,” said Bjornar Tonhaugen of Rystad Energy.
OPEC’s de facto leader Saudi Arabia and Russia need to show a balance in raising oil prices to meet their budget needs while not pushing them much above $ 50 a barrel to avoid encouraging a resurgence of rival US shale production.
It was not immediately clear whether Saudi Arabia, the United Arab Emirates and Kuwait would extend beyond June their additional voluntary reductions of 1.18 million barrels per day, which are not part of the deal.
The April deal was reached under pressure from US President Donald Trump, who wants to avoid bankruptcies in the US oil industry. Trump, who previously threatened to pull US troops out of Saudi Arabia if Riyadh did not act, spoke to the Russian and Saudi leaders ahead of Saturday’s talks, saying he was pleased with the price recovery.
Although oil prices have partially recovered, they are still well below the costs of most US shale producers. Closures, layoffs and cost cuts continue in the United States.
“I applaud OPEC-plus for reaching an important deal today which comes at a pivotal time as demand for oil continues to recover and economies reopen around the world,” the US secretary wrote to Dan Brouillette Energy on Twitter after extra time.
As global lockdowns ease, demand for oil is expected to exceed supply in July, but OPEC has yet to clear 1 billion barrels of excess oil stocks accumulated since March.
Rystad’s Tonhaugen said Saturday’s decisions would help OPEC reduce inventory at a rate of 3-4 million bpd in July-August. “The faster stocks fall, the more prices will rise,” he said.
Nigeria’s petroleum ministry said Abuja supported the idea of offsetting its excess production in May and June.
Iraq, with one of the worst compliance rates in May, has agreed to further cuts although it is not clear how Baghdad would come to an agreement with the oil majors on cutting Iraqi production.
Iraq produced 520,000 b / d over its quota in May, while Nigeria’s overproduction was 120,000 b / d, Angola’s was 130,000 b / d, Kazakhstan’s was 180. 000 bpd and Russia’s 100,000 bpd, according to OPEC + data.
The OPEC + joint ministerial follow-up committee, known as JMMC, will meet monthly until December to review the market, compliance and recommend reduction levels. The next JMMC meeting is scheduled for June 18th.
OPEC and OPEC + will hold their next meetings scheduled from November 30 to December 1.