“Seriously determined to stabilize the situation”: OPEC + countries conclude a new deal to reduce oil production

OPEC + countries agreed on the terms of a new deal to reduce oil production from May 1, 2020. This was announced by Minister of Energy of Russia Alexander Novak. Moreover, the agreement has already been discussed by Russian President Vladimir Putin, his American counterpart Donald Trump, and the King of Saudi Arabia, Salman bin Abdel-Aziz al Saud.

“The leaders supported the agreement reached within the OPEC-plus on phased voluntary limitation of oil production in order to stabilize global markets and ensure the sustainability of the global economy as a whole. This agreement comes into force, ”the Kremlin’s official website says.

In addition, Vladimir Putin held a separate conversation with Donald Trump, during which the great importance of the OPEC + deal was noted, and issues of ensuring strategic security were discussed.

In turn, the American leader thanked the Russian president and king of Saudi Arabia.

“A major OPEC + oil deal has been concluded. This will save hundreds of thousands of jobs in the US energy sector. I would like to thank and congratulate Russian President Putin and King Salman of Saudi Arabia. Just talked to them in the Oval Office. Great deal for everyone! ” - Trump wrote on his Twitter.

The big Oil Deal with OPEC Plus is done. This will save hundreds of thousands of energy jobs in the United States. I would like to thank and congratulate President Putin of Russia and King Salman of Saudi Arabia. I just spoke to them from the Oval Office. Great deal for all!

Meanwhile, the head of the Ministry of Energy told details about the agreements reached. He emphasized that the deal is a long-term one.

“Today’s deal gives the world a signal that producing countries have come together to fix the deal for two years. It is long-term, not the same as it was before, when we agreed on six months, nine months ... The deal is long-term and emphasizes that we are all serious about stabilizing the market, ”TASS reports.

He also said that during the negotiations another option was also considered. According to Novak, the refusal to coordinate the efforts of exporting countries was also discussed. In this case, the market would be balanced due to a decrease in demand and prices for energy raw materials.

“But that would be a shock drop in price. This would be a catastrophic action for the oil industry in many countries ... In a month and a half, the storage facilities would be full due to overproduction of 15-20 million barrels per day. It would be a collapse, ”said the head of the Russian Ministry of Energy.

In addition, he noted that the agency will soon meet with Russian oil companies and discuss the flexible allocation of quotas to reduce raw material production. According to him, the base level, which will be taken into account when calculating the maximum allowable production volumes, for Russia and Saudi Arabia will be 11 million barrels per day. Thus, both states will be able to produce up to 8.5 million barrels per day, without taking into account condensate. For all other participants in the transaction, the base level will be the production level in October 2018.

• Alexander Novak
• Reuters
• © LEONHARD FOEGER

At the same time, Novak believes that the agreement will positively affect the balancing of the market and oil prices, however, he did not make forecasts regarding changes in the cost of energy.

Meanwhile, the total decline in oil production by 23 OPEC + countries in May and June will amount to 9.7 million barrels per day, rather than 10 million, as previously assumed. The fact is that Mexico did not agree to undertake obligations to reduce production by 400 thousand barrels per day and was limited to only 100 thousand bpd from May to June 2020. The position of Mexico City was the main obstacle to the conclusion of agreements. According to the head of the Ministry of Energy of the Russian Federation, negotiations between Moscow, Washington and Riyadh helped to reach a consensus on this issue: the remaining 300 thousand b / s will be taken over by the United States.

Moreover, Novak noted that US oil production is projected to decrease by 2-3 million bps, but this volume is not included in the 9.7 million bps agreed by OPEC +, since Washington is not a party to the agreement

In turn, the Iranian Ministry of Oil said that in the second half of 2020, the volume of production reduction will be reduced to 8 million b / s. This statement was made by the head of the Iranian department Bijan Namdar Zangane, reports TASS. According to him, after 2020 and until the end of the transaction, i.e. until April 2022, the level of reduction in raw material production will be 6 million bps. In addition, according to Zangane, Saudi Arabia, Kuwait and the UAE have agreed to further reduce supplies by 2 million bpd.

Recall that in 2016, OPEC countries and 11 countries outside the cartel, including Russia, agreed on a simultaneous limitation of oil production. This was necessary in order to restore the balance of supply and demand in the global energy market and to keep commodity prices from significant fluctuations.

The duration of the agreement was repeatedly extended, and the volume of reduction increased. In early 2020, due to the onset of the coronavirus pandemic, oil began to become cheaper. It was expected that the parties to the transaction would agree on a further reduction in energy production, however, in March the parties did not reach consensus and as a result decided to completely abandon their obligations.

As a result, oil prices collapsed. The cost of Brent crude in the moment fell below $ 22 per barrel - for the first time since March 2002. Quotes later recovered slightly and are now at the level of $ 31-32.

At the same time, Vladimir Gutenev, deputy chairman of the State Duma committee on economic policy, industry, innovative development and entrepreneurship, believes that thanks to the deal, oil prices will begin to gradually recover.

“I don’t think that during the first month and a half we will see a strong increase in the price, maybe it will rise slightly on the news, but it is unlikely to be $ 35 per barrel. A little later, if the contracts are implemented, by the fall, I think, a gap of $ 40-43 is quite possible, ”Gutenev said in an interview with RT.