Market doubts record production cuts of OPEC+ will be enough

OPEC+ yesterday revealed plans for record production cuts of 10 million barrels per day but the deal currently hinges on Mexico, which did not agree with the proposed cuts. Even if OPEC+ does reach consensus, the market doubts if the cuts will be deep enough. 

OPEC and its allies yesterday announced they plan to cut oil production by 10 million barrels per day, which according to Reuters corresponds to about 10% of the oil supply before the coronavirus hit transportation and economic activity.

The 10% cut would start May 1st and last for two months after which OPEC+ plans to ease the production cuts to 8 million bbl/d for the remainder of the year. Per January 1st 2021, the cuts would be eased further to 6 million bb/d for a period of 16 months.

The deal currently hinges on Mexico, the only member state not to agree with the proposed cuts. The deal would see Mexico lower its production by 400,000 bbl/d but Mexico’s Energy Secretary Rocio Nahle Garcia said he is not willing to introduce cuts bigger than 100,000 bbl/d.

OPEC+ also called on other major producers like the US and Canada “to contribute to the efforts aimed at stabilizing the market.” G20 oil ministers are meeting today. Bloomberg reports that countries outside of OPEC+ could contribute as much as 5 million barrels a day of additional reductions.

Market disappointed

Even though productions cuts of 10 million bbl/d are a new record for OPEC+, the market has been underwhelmed by the outcome of the meeting, reports Reuters. Early in the day before the meeting oil prices had risen in anticipation of cuts as deep as 15 to 20 million bbl/d.

“OPEC+ seems to disappoint the market more often than not. They needed to move mountains here and they maybe moved a hill”, managing partner John Kilduff of Again Capital, a New York-based investment firm focused on energy, told the press agency.

Bjornar Tonhaugen, head of oil markets at Rystad Energy told Reuters a 10 million-bpd deal is far lower than what the market needs at the moment. “And even that seems to be of a fragile nature, as OPEC+ producers appear to struggle to agree, dragging negotiations longer than expected”, he said.

The coronavirus and an oil price war between Saudi Arabia and Russia have caused oil prices to crash. In January, a barrel of Brent oil cost just below 70 dollars but that price has dropped to roughly 30 dollars. Rystad Energy estimates that worldwide one million oil and gas professionals could lose their jobs as oil companies are rapidly scaling back investments.

Author: Tobias Pieffers

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