OPEC tempers historic pumping cut with reopening of economy

The recovery in demand has been stronger than expected thanks to the upturn in Asia and the United States
Shengli oil field operated by Sinopec in Dongying, Shandong province (China)

REUTERS/CHEN AIZHU  -   Shengli oil field operated by Sinopec in Dongying, Shandong province (China)

Although the COVID-19 pandemic continues to wreak havoc around the world, especially in Latin America, economic activity is beginning to recover. And that means increased oil consumption. Asia and the United States are demanding more and more oil and the recovery is being more intense than expected. In view of this rebalancing of the market, OPEC+, the alliance formed by OPEC member countries and ten independent producers, has announced that it will ease the historic production cut as of August 1st this Wednesday during a virtual meeting. From that date onwards, they will withdraw 8.1 million barrels per day (mbd) instead of the 9.7 million (mbd) they have been withdrawing up to now. 

"I believe that the major difficulties linked to the fall in world demand are now behind us," said Alexander Novak, Russia's energy minister. "We see encouraging signs of improvement. Economies around the world are opening up, although it is a gradual and cautious process, and there may be partial localised closures in some places," said Abdelaziz bin Salman, Saudi Arabia's energy minister. 

Ministro de Energía
REUTERS/DENIS BALIBOUSE - The Minister of Energy of Saudi Arabia, Prince Abdulaziz bin Salman Al-Saud

This is not a change in the organization's plans, as a roadmap had been agreed to smooth out the historic cutback launched on 1 May as demand began to recover. In the second phase of the plan, the cut was to be reduced to 7.7 million barrels, although Bin Salman himself said that this figure could actually be around 8.1 million barrels, as some countries that did not implement the cuts in May and June will now do so to a greater extent, to help the common effort to reduce supply.

However, the Saudi Arabian minister explained that the exact figure "will be known in early August". This means that an increase in supplies of up to 1.6 mbd is expected for that month, which would reach two mbd between September and the end of the year. In the following 16 months, the total cut will be reduced to 5.8 mbd.

"OPEC has every reason to end the period of ultra-intensive cuts, as oil markets are reacting much faster than expected to excess supply. The global recovery is being very strong in Asia and the United States," Michel Salden, head of Commodities at Vontobel Asset Management, said in a client analysis sent to the media on Thursday. OPEC production cuts, in addition to involuntary closures in non-OPEC countries (such as Canada, the United States and Brazil), have helped cushion the global demand deficit in the second quarter.

The oil association's energy ministers have stressed that the measure should not put downward pressure on barrel prices, which, although they have recovered from the lows to which they fell in April, are now above $43, far from satisfactory for producers. In this context, they have stressed that the increase in supply will hardly be exported, as most of it will be absorbed by the growth in domestic demand in producing countries.

Pozo Texas
AP/ERIC GAY - The sun sets behind an oil pump near Karnes City, Texas

"The oil markets will suffer a great lack of investment in 2021, as the big Western oil companies are disinvesting. Only Exxon and Total are keeping their production capacity stable, while their European rivals are reallocating investment from oil production to gas and renewable energies," explained Michel Salden, head of Commodities at Vontobel Asset Management consultancy. 

Discipline in the cuts

The committee that met on Thursday, in charge of monitoring internal discipline, has assured that compliance with the cuts was 107% in June, although not all countries respected their commitments equally. Those that do not must not only adhere to the established quotas, but also withdraw what they have produced in excess. According to various sources consulted by the agency Efe, this may mean an additional reduction of more than 800,000 mdb in the next two months.

From the beginning, the commitment to limit production is more flexible for Venezuela, Iran and Libya, due to the involuntary falls that their oil activities suffer for various reasons (sanctions, economic crisis, armed conflict). Since July 1, Mexico has also been left out, which did participate in the cutback in May and June, as confirmed by the Algerian Minister of Energy and current OPEC president, Abdelmadjid Attar.