The OPEC + emergency video conference hosted by Saudi Arabia ended in the early morning of April 13, Beijing time. According to reports from multiple Saudi media outlets quoted by CCTV News, participating countries finally reached an agreement to reduce production. The first phase will reduce crude oil production by 9.7 million barrels per day in May and June this year. This is also the largest production reduction agreement reached since the establishment of the OPEC+ mechanism.
It is worth noting that Mexico has not yet made a "compromise" on the 100,000 barrels per day production cut, but other oil-producing countries have made concessions. This also highlights the differences between oil-producing countries, so in the future this The enforcement of the agreement also remains to be seen. In addition, major international banks such as Goldman Sachs even bluntly stated that the OPEC+ production reduction agreement is historic, but the scale of production reduction is insufficient, and oil prices will fall further in the next few weeks.
At 6:00 on the 13th, Beijing time, New York crude oil rose sharply by more than 8% after opening, and then gave up the gains and turned down, fluctuating sharply, highlighting the uncertainty of the market.
OPEC+ reached the largest production reduction agreement
Previously, Saudi Arabia, Russia and other countries reached a preliminary production reduction intention at the OPEC+ mechanism emergency meeting held on the 9th, planning to reduce crude oil production by 10 million barrels per day in May and June, but Mexico is not satisfied with its own of 400,000 barrels per day, but expressed its willingness to cut production by only 100,000 barrels per day, causing the agreement to fail to take effect.
In the latest meeting that ended in the early morning of April 13th, Beijing time, the participating countries agreed to reduce Mexico’s share of production cuts to 100,000 barrels per day.
OPEC+ confirmed the first round of production cuts for two months starting from May 1, 2020, with a production reduction of 9.7 million barrels per day; from July 1 to December 2020, a production reduction of 7.7 million barrels per day; from 2021 Production will be reduced by 5.8 million barrels per day from January 2020 to April 2022. The production reduction agreement will expire on April 30, 2022, but the extension of the production reduction agreement will be evaluated in December 2021. OPEC Secretary-General Barkindo described the crude oil production cuts as historic.
Mexico confirmed that it would only cut production by 100,000 barrels per day in the first two months, instead of the original 300,000-400,000 barrels per day. Saudi Arabia, one of the initiators of this round of oil price war, announced that it will reduce production to 8.5 million barrels per day starting in May. Once Saudi Arabia's production cuts are in place, it will be the country's lowest oil production level since 2011.
The OPEC+ mechanism was established in 2016 and consists of 23 non-OPEC oil-producing countries including Saudi Arabia-led OPEC and Russia. However, the United States, the world's largest oil producer, did not participate in this mechanism.
After the emergency meeting of the OPEC+ mechanism held on April 9, at the G20 (G20 member states) Energy Ministries Ministerial Meeting held from April 10 to 11, many parties failed to reach an agreement on production cuts. In the early morning of April 11, local time, the Ministry of Energy of Saudi Arabia, which holds the rotating chairmanship of the G20, officially released the communiqué of the G20 Energy Ministers’ Meeting, which did not explicitly propose production cuts.
The communique shows that the energy ministers of the G20 recognized that the spread of the new coronavirus pneumonia epidemic has exacerbated the imbalance between energy supply and demand and the instability of the energy market, and has directly had a negative impact on the oil and natural gas and other industries. The participating countries agreed to continue to cooperate closely, determined to hold another energy ministers meeting in September, and were ready to hold an emergency meeting if necessary.
Goldman Sachs: Oil prices will continue to fall
Analysts pointed out that the difficulty in bridging differences is the main reason for the slow reaching of the production reduction agreement.
The main focus is Mexico, which needs to reduce production by 400,000 barrels per day according to the agreement. However, Mexico expressed opposition to this agreement and stated that it was only prepared to reduce production by 100,000 barrels per day. Its attitude has not changed. Judging from the latest news, other oil-producing countries have made concessions and accepted it.
Industry experts said that despite the introduction of the production reduction agreement, the crude oil supply and demand outlook and crude oil prices are even more foggy. In fact, even if major oil-producing countries reach an agreement to reduce production in principle, the scale of production reduction will not be enough to make up for the sharp decline in global oil demand caused by the epidemic. A production cut of 10 million barrels per day is still not enough for the market, which may not keep up with the demand decline given the weak demand caused by the new coronavirus epidemic.
Goldman Sachs issued a report immediately stating that although the OPEC+ production reduction agreement is "historic", "the scale of production reduction is insufficient." Oil prices are expected to fall further in the coming weeks.
UBS said it expects Brent and WTI oil prices to remain at US$20 per barrel at the end of June, but as the epidemic subsides and the economy recovers, international oil prices will rise to US$40 per barrel or above in the second half of the year. At present, oil-producing countries are facing an "oil shortage", and many commercial oil storage facilities are overwhelmed. The U.S. government even plans to lease strategic petroleum reserve space to oil companies. The plunge in oil prices is certainly detrimental to oil-producing countries, but it is a rare purchasing opportunity for consuming countries.
