On the verge of ending oil price war, OPEC+ awaits Mexico to join the pact
- Outlook & strategy
OPEC, Russia, and allies are on the verge of ending the oil price war in an effort to save the oil industry which, in addition to the oil price war consequences, suffered even more as the coronavirus pandemic further curbed the oil demand, creating a whirlwind of adverse effects. However, the allies are still waiting on Mexico to join the production cuts pact.
In a historical meeting of OPEC, Russia, and other allies on Thursday, 9 April new oil production cuts have been agreed to end the oil price war, which started in March, with the OPEC+ group agreeing to eliminate 10 million barrels of crude per day for an initial two-month period. The two-month period starts on 1 May and ends on 30 June 2020.
For the subsequent period of six months, from 1 July 2020 to 31 December 2020, the total adjustment agreed will be 8.0 mb/d. It will be followed by a 6.0 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.
The meeting also called upon all major producers to contribute to the efforts aimed at stabilizing the market.
The countries also agreed to meet on 10 June 2020 via webinar, to determine further actions, as needed to balance the market.
All of this was agreed by all the OPEC and non-OPEC oil-producing countries participating in the Declaration of Cooperation, with the exception of Mexico, and as a result, the agreement is conditional on the consent of Mexico.
Mexico is the only country in the extended OPEC+ group to have refused to take part in the cuts at the same level as others. The country’s energy minister Rocio Nahle proposed a reduction in national output of 100,000 barrels per day instead of the 400,000 barrels per day requested.
When it comes to the rapid fall in the oil demand, Wood Mackenzie, an energy consultancy group, said on Thursday that the problem is the scale of the fall, especially during April and forecast for 2Q 2020.
Assuming the containment shut-ins are in place most severely during April, then ease slowly in the following several months, Wood Mackenzie expects world oil demand to fall over 8 million b/d year-on-year for 2Q 2020.
Ann-Louise Hittle, Woodmac’s vice president, Macro Oils, said: “April will see the sharpest drop, with a year-on-year decline of over 15 million b/d as coronavirus containment measures are at their steepest.”
Hopes for further cuts from G20
Though the new OPEC+ deal is not dependent on additional cuts from outside the group to move forward — such as the United States, Brazil and Canada — OPEC+ is hoping for additional cuts from these and other G20 countries, Africa Oil & Power, the continent’s platform for energy investment and policy, said on Friday.
The fate of a new “OPEC++” deal, in which additional countries could sign up to production cuts, is the focus of a virtual meeting of G20 energy ministers on Friday, with the US Energy Secretary Dan Brouillette among the global energy leaders expected to participate in the webinar. Alberta Energy Minister Sonya Savage was on Thursday’s OPEC+ call, a first for Canada.
The OPEC+ production cuts would just run through June 10, when OPEC+ is set to meet again. Iran, Libya and Venezuela will be exempted from the agreement. Saudi Arabia and Russia would bear the brunt of the cuts.
Impact on Africa
Africa has a lot to lose from a sustained low oil price, in addition to the damaging economic impacts of COVID-19. Economic powerhouses like Nigeria and Angola, which reportedly had difficulty selling oil production earmarked for export in April, could take especially hard hits, made especially vulnerable by a lack of economic diversification, according to Africa Oil & Power.
The continent’s oil producers have pushed for cooperation at the OPEC+ meeting, urging for a stabilized oil market and reduction in production.
Foumakoye Gado, President of the Council of Ministers of APPO and the Minister of Petroleum of Niger, said: “We reiterate our support to OPEC and non-OPEC member countries as well other global oil producers in their concerted efforts at ensuring long term stability of the global oil market. Furthermore, we urge the G20 countries to offer assistance to Africa as we struggle to ward off this pandemic and price stabilization process in the oil markets”.
Timipre Marlin Sylva, the Minister of State for Petroleum Resources of Nigeria, said: “Nigeria, like the rest of the world, has been hit by the Global Pandemic, COVID-19, and is prepared to join the rest of the world in making the necessary sacrifices needed to stabilize the crude oil market; and to prevent what is likely to be a major global economic meltdown”.
OPEC deal ‘a good one’
Timipre Marlin Sylva, the Minister of State for Petroleum Resources of Nigeria, said: “The OPEC deal is a good one. We can work with it for now. African countries will not recover from COVID-19 and the associated economic difficulties without a strong energy sector. The oil industry helped the continent pull itself out of the last economic recession of 2008”.
Ayuk added: “A global cut would be better and everyone needs to put some skin in the game, especially our friends from the US, Canada and Norway”.
According to Africa Oil & Power, the International Monetary Fund is already working closely with African countries to stave off recessions and economic collapse. Governments throughout the continent are calling for debt relief as the global economic crisis deepens. The World Bank and the IMF have both expressed support for debt relief as less developed economies navigate the COVID-19 fallout.