The deal will underpin the oil market recovery, easing the financial pain felt by resource-dependent emerging economies, shale explorers in Texas, and blue-chip companies like Royal Dutch Shell Plc.
It’s a victory for Saudi Arabia and Russia, who put a destructive price war behind them to successfully cajole Iraq, Nigeria and other laggards to fulfill their obligations.
The two leaders of OPEC+ showed that they intend to keep a close watch on the oil market, meeting every month to assess the evolving balance between supply and demand amid an uncertain economic recovery from the global pandemic.
After a video conference lasting several hours on Saturday, delegates said all nations had signed off on a new deal for a production cut of 9.6 million barrels a day next month.
That’s 100,000 barrels a day lower than the reduction in June because Mexico will end its supply constraints, but a tighter limit than the 7.7 million barrels a day set for July in the group’s previous agreement, they said.
In addition, the approved communique states that any member that doesn’t implement 100% of its production cuts in May and June will make extra reductions from July to September to compensate for their failings.
Those promises are a particular vindication for the Saudi Energy Minister Prince Abdulaziz bin Salman, who has consistently pushed fellow members to stop cheating on their quotas since his appointment last year.
But they could also add an element of risk. In theory, the entirety of the 23-nation production agreement, which runs until April 2022, is now contingent on every member making 100% of their pledged cuts, according to the communique.
That’s something rarely achieved in the 3 1/2 years that OPEC+ has existed, or indeed the decades-long history of the Organization of Petroleum Exporting Countries itself.
Oil has just posted a sixth weekly gain in London, more than doubling to $42.30 a barrel since April as traders anticipate tighter supplies as demand recovers from the coronavirus lockdowns.
U.S. President Donald Trump on Friday hailed the cuts from OPEC and its allies for saving the American energy industry.
The oil market “is still in a fragile state and needs support,” Russia’s Energy Minister Alexander Novak said in opening remarks at the virtual meeting. “That is why today more than ever it is important to adhere to 100% compliance.”
The group hopes to build on its success by pushing the market into a supply deficit next month, using a price structure called backwardation to start to chip away at the billion barrels of oil stockpiles that built up during the pandemic.
There was no discussion in the meeting about the future of the additional 1.2 million barrels a day of voluntary output cuts being implemented by Saudi Arabia and its Gulf allies in June, delegates said.
The cartel will meet again in the second half of June for another review of the oil market.
Talks are scheduled on June 18 for the Joint Ministerial Monitoring Committee, which could recommend a further extension if it’s deemed necessary, pushing the deep production cuts into August, a delegate said.
That panel will meet every month until December, according to the communique.
The next full ministerial OPEC+ meeting has been scheduled for Nov. 30 to Dec. 1, delegates said, although the communique notes that a conference could be held whenever it is required.
SOURCE BUSINESS DAY
