Major oil producing countries on Easter Sunday struck a historic deal with other players that could see up to 20 million barrels of oil per day removed from a severely oversupplied oil market. The deal is set to boost the oil price and provide some much-needed stability for an industry in crisis.
Initially announced Thursday, the agreement was delayed as Mexico refused their share of production cuts. The original OPEC+ deal would have seen a cut of 10 million barrels of crude per day from an October 2018 baseline, for an initial two-month period.
With OPEC+ letting Mexico off the hook, the official OPEC+ cut now stands at 9.7 million barrels, as Mexico agrees to cut 100,000 barrels per day instead of 400,000 barrels per day.
In reality, however, the OPEC+ deal will cut more than the quoted 9.7 million barrels, since current production levels are much higher than the October 2018 baselines used to calculate the production cuts.
The deal sees Russia and Saudi Arabia absorbing the brunt of the cuts, each agreeing to cut their production down to 8.5 million barrels per day. Saudi Arabia’s production stood at 12.3 million barrels per day, and Russia was producing 11.29 million barrels of oil per day in March. Both countries, however, used 11 million barrels per day as their baseline in the deal.
“These production adjustments are historic. They are the largest in volume and the longest in duration, as they are planned to last for two years. We are witnessing today the triumph of international cooperation and multilateralism which are the core of OPEC values,” said Secretary General of OPEC Mohammed Barkindo.
Barkindo also noted that the OPEC+ deal paves the way for further collaboration with the G20.
In a meeting on Friday, the G20 nations also agreed to take action to stabilize the market. The United States, for example, is set to use the Strategic Petroleum Reserve to store vast quantities of oil. Additionally, the US will see production cuts of at least 2 million barrels as the market responds to a lack of demand. The US has also reportedly offered to take on an additional cut of 300,000 barrels per day on Mexico’s behalf, although the details of how such a deal would play out have not been released.
The OPEC+ group is expected to request the G20 to cut over 3 million barrels per day of production. The G20 energy ministers agreed Friday to create a task force to monitor the situation and formulate strategies. The Texas Railroad Commission, the agency that regulates the state’s oil and gas industry, is also scheduled to meet on Tuesday to discuss regulating formal cuts, though the US has largely maintained that the free market will determine oil production cuts.
Hope for Africa
The historic production cuts provide a much-needed financial boost to Africa’s oil and gas producers as the sudden drop in oil and gas prices coincided with the COVID-19 health crisis and the economic repercussions of closing businesses and restricting movement to deal with the pandemic.
In a statement, Nigeria’s Minister of State for Petroleum Resources, Chief Timipre Marlin Sylva, said he expects the oil price to rebound by $15 per barrel in a short-term outlook.
“This also promises an appropriate balancing of Nigeria’s 2020 budget that has been rebased at $30 per barrel,” he said in a statement.
NJ Ayuk, Chairman of the African Energy Chamber, lauded the efforts of the OPEC+ deal, as a stable oil market will provide economic relief and save jobs throughout the continent.
“OPEC has hit a home run,” Ayuk said. “OPEC has breathed life and given hope to African nations, oil workers, investors and the African business community. We need to focus on exploration soon again. Now we have the ball; we need to run with it and start the process of bouncing back. We need to defend the African oil industry like a junkyard dog in the face of a hurricane.”
South Sudan, a member of the OPEC+ alliance, also welcomed the deal, said the country’s Minister of Petroleum Puot Kang Chol.
“South Sudan is East Africa’s only producing country. Our production was over 350,000 barrels per day before the civil war. At the present moment, we are producing about 185,000 barrels per day with a target on attracting more investment into the oilfields to get our nation to 300,000 barrels per day. The current price war and coronavirus has affected our economy,” he said.
Each nation, aside from Saudi Arabia and Russia, which are both cutting substantially more, is expected to cut 23 percent of production from May to June. Iran, Libya and Venezuela are exempted from the production cuts, and Mexico is only cutting 100,000 barrels per day.
After this initial two-month period, overall production cuts will lower to 8 million barrels per day from July to December and then lower to 6 million barrels per day from January 2021 to April 2022.