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Oil prices fall despite OPEC, Russia agreement to cut production

10 Apr 2020, 11:19 am
Financial Nigeria
Oil prices fall despite OPEC, Russia agreement to cut production

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In an online meeting on Thursday, Saudi Arabia and Russia, the two biggest producers in OPEC+, agreed between them to cut about 5 million bpd.

An oil pumpjack

Oil prices dropped early on Friday despite the proposed output cut of a record 10 million barrels per day (bpd) by the Organisation of Petroleum Exporting Countries (OPEC) and other non-OPEC producers, including Russia and Mexico, a group collectively known as OPEC+. In an online meeting, which held on Thursday, Saudi Arabia and Russia, the two biggest producers in the group, agreed between them to cut about 5 million bpd.

Other OPEC+ producers agreed to cut an additional 5 million bpd amid a growing oil surplus, estimated at 14.7 million bpd. As the coronavirus (Covid-19) outbreak began to weigh heavily on business activities and caused a market panic in early March, Russia had refused to join OPEC to cut production to stabilize the oil market. The decision led Saudi Arabia to ramp up supply to a record high of 12.3 million bpd from 9.7 million bpd, launching a price war.

The output cut deal cannot be finalised without Mexico's full cooperation. The country has refused to sign up to the deal. Mexico’s energy minister, Rocío Nahle García, left the meeting before it ended in the early hours of Friday morning. In a post she put on Twitter after leaving the meeting, Garcia said Mexico would reduce production by 100,000 barrels a day, far less than the 400,000 barrels a day proposed by OPEC+ for her country.

During the meeting, Mohammad Barkindo, OPEC's Secretary-General, urged the group and other oil producers outside the alliance to take action to tackle the oversupply. “Covid-19 is an unseen beast that seems to be impacting everything in its path,” Barkindo said. “The supply and demand fundamentals are horrifying.”

Brent crude, the global benchmark, which was trading around $32 a barrel on Thursday, dropped by 4.14 per cent to $31.48 per barrel as at 9.45 GMT on Friday. The West Texas Intermediate, the US benchmark, declined 9.29 per cent to $22.76 per barrel.

As nations across the world have imposed travel restrictions to reduce the spread of Covid-19, several analysts have said even a historic oil production cuts won’t be enough to boost prices.

"The collapse in oil prices is a result of the reality that while OPEC is cutting as expected, there is simply too much crude in the physical space for sale, with too few pipelines to move it and too few buyers to take it," Scott Shelton, energy specialist at ICAP, a global financial services company, told Reuters.

A new report from Rystad Energy, a Norwegian energy research and business intelligence company, shows that oil demand is set to plunge by as much as 27 million bpd in April, down from the global demand of more than 100 million bpd before the pandemic. Such a decline has never occurred in the history of oil, according to the report. The three largest consumers, China, Japan and India, will account for nearly 5 million bpd of the decline.

The report, therefore, cautioned that the world may run out of storage capacity due to the expected oversupply, a situation that will cause refineries to shut-in and crude oil prices to reach extreme low. Rystad expects demand growth to remain negative in 2020.

The proposed output cuts by OPEC+, which came after US President Donald Trump decried the price war by Russia and Saudi Arabia, is expected to gradually reduce over time, ending in April 2022. The cartel is expected to call on the US, and other oil producing countries, to cut another 5 million bpd when G20 energy ministers meet at its extraordinary meeting today.


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