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Opec, Russia extend record oil cuts to end of July

Reuters/Dubai
Filed on June 6, 2020

(Reuters)

Opec, Russia and allies agreed on Saturday to extend record oil production cuts by one month until the end of July, five Opec+ sources told Reuters after the group held a video conference.

The group, known as Opec+, also demanded countries such as Nigeria and Iraq, which exceeded production quotas in May and June, compensate with extra cuts in July to September.

“Opec+ agreed to extend oil output cuts until end of July,” Suhail bin Mohammed Faraj Faris Al Mazrouei, UAE Minister of Energy and Industry, tweeted soon after the virtual meeting of major oil producers.

Opec+ had initially agreed in April that it would cut supply by 9.7 million barrels per day (bpd) during May-June to prop up prices that collapsed due to the coronavirus crisis. Those cuts were due to taper to 7.7 million bpd from July to December.

Benchmark Brent crude climbed to a three-month high on Friday above $42 a barrel, after diving below $20 in April. Prices still remain a third lower than at the end of 2019.

Brent crude futures settled up $2.31, or 5.8 per cent, at $42.30 a barrel, surging 19.2 per cent on the week. US West Texas Intermediate (WTI) crude futures rose $2.14, or 5.7 per cent, to $39.55 a barrel, rising 10.7 per cent on the week.

“Demand is returning as big oil-consuming economies emerge from pandemic lockdown. But we are not out of the woods yet and challenges ahead remain,” Saudi Energy Minister Prince Abdulaziz bin Salman told the video conference of Opec+ ministers.

Benchmark Brent crude climbed to a three-month high on Friday above $42 a barrel, after diving below $20 in April. Prices still remain a third lower than at the end of 2019.

“Prices can be expected to be strong from Monday, keeping their $40 plus levels,” said Bjornar Tonhaugen from Rystad Energy.

Saudi Arabia, Opec’s de facto leader, and Russia have to perform a balancing act of pushing up oil prices to meet their budget needs while not driving them much above $50 a barrel to avoid encouraging a resurgence of rival US shale production.

Russian energy minister Alexander Novak said on Saturday the global oil market was still fragile and it was important for all Opec and non-Opec members to comply in full with an oil output pact.

“We already see the first green shoots in terms of restoration of business activity ... The oil market is still fragile, it needs support. So it is important today, as never before, I believe, that all the deal’s participants maintain 100% compliance,” he said.

BULGING INVENTORIES

The April deal was agreed under pressure from US President Donald Trump, who wants to avoid US oil industry bankruptcies.

Trump, who previously threatened to pull US troops out of Saudi Arabia if Riyadh did not act, spoke to the Russian and Saudi leaders before Saturday’s talks, saying he was happy with the price recovery.

While oil prices have partially recovered, they are still well below the costs of most US shale producers. Shutdowns, layoffs and cost cutting continue across the United States.

As global lockdown restrictions to halt the spread of the coronavirus are being eased, oil demand is expected to exceed supply sometime in July but OPEC has yet to clear one billion barrels of excess oil inventories accumulated since March.

Tonhaugen said Saturday’s decisions would help Opec reduce inventories at a rate of three million to 4 million bpd over July-August.

“The quicker stocks fall, the higher prices will get. And that is crucial for many Opec+ economies, whose fiscal budgets count on oil sales,” he said.

Nigeria’s petroleum ministry said Abuja backed the idea of compensating for its excessive output in May and June.

Iraq, with one of the worst compliance rates in May, agreed to extra cuts although it was not clear how Baghdad would reach agreement with oil majors on curbing Iraqi output.

Iraq produced 520,000bpd above its quota in May, while overproduction by Nigeria was 120,000bpd, Angola’s was 130,000bpd, Kazakhstan’s was 180,000bpd and Russia’s was 100,000bpd, according to Opec+ data.

Opec+’s joint ministerial monitoring committee, known as the JMMC, would now meet every month until December to review the market, compliance and recommend levels of cuts.

The next JMMC meeting is scheduled for June 18, while the next full Opec and Opec+ meeting will take place on November 30-December 1.

- Reuters


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