As production increases in April, Saudi Arabia, the United Arab Emirates and Kuwait will voluntarily reduce production beyond the agreed quotas. As a result, the entire OPEC+ production reduction will reach 12.5 million barrels per day.
There has never been a production reduction agreement that has reached this scale, and there has never been a production reduction negotiation that has been so suspenseful. . After a four-day marathon meeting, OPEC+ announced that it would cut production by 9.7 million barrels per day in May and June, close to 10% of the total global crude oil supply, bringing an end to the month-long price war.
“We have opened a new page of history in the oil world.” OPEC Secretary-General Mohammed Barkindo said in the agreement After the agreement was reached, it was stated that the meeting reached a historic production adjustment, which was not only record-breaking in scale, but also lasted for two years. “Today, we witnessed the victory of international cooperation and multilateralism, which are the core of OPEC’s values.”
At the OPEC+ meeting on April 9, when Saudi Arabia and Russia agreed After reducing production in May and June to 8.5 million barrels per day, a production reduction agreement of up to 10 million barrels per day is imminent. However, this agreement was unexpectedly opposed by Mexico, which insisted that it could only fulfill a quarter of its quota, which is 100,000 barrels per day, causing the negotiations to close to breakdown after 10 hours.
After three days of emergency diplomatic mediation, the negotiations finally got back on track. U.S. President Trump announced that in addition to Mexico’s 100,000 barrels/day production cut, the United States will cut production by 300,000 barrels/day on behalf of Mexico.
Despite the U.S. rescue, Mexico’s disruption still caused OPEC+ to reduce the scale of production cuts: the scale of production cuts in May and June was 9.7 million barrels per day, rather than 9.7 million barrels per day. Initially planned to be 10 million barrels per day; starting in July, the scale of production cuts will be reduced to 7.7 million barrels per day, instead of the previously planned 8 million barrels; and then the scale of production cuts will be further reduced to 580 million barrels per day from January 2021 to April 2022. 10,000 barrels per day, instead of the originally planned 6 million barrels per day.
OPEC+ also hopes that the G20 will implement an additional 5 million barrels per day of production cuts to expand the scale of production cuts. However, the G20 Energy Ministers’ meeting held on April 10 did not mention production cuts in the communique issued after the meeting, but only stated that measures would be taken to ensure market stability. Saudi Energy Minister Abdulaziz bin Salman said on April 12 that the G20 would cut production by about 3.7 million barrels per day. Coupled with purchases by International Energy Agency member countries, the total production reduction will reach 19.5 million barrels per day.
On April 13, oil prices turned down after initially jumping around 8%, giving up all the previous gains, and then rebounded slightly. As of press time, oil prices had been falling that day. Low shock.
Victor Shum, vice president of energy at IHS Markit, told the 21st Century Business Herald reporter that OPEC+ The production cut deal helped reduce bearish market sentiment for some time. But while the deal will limit further builds of inventories, it won’t be able to quickly eliminate the massive glut of crude oil that already exists. “Brent crude oil prices are likely to fall further in the coming weeks as global reserves increase and demand bottoms out.”
After the agreement was reached, Saudi Arabia on April 13 Japan announced the official selling price of crude oil for May, lowering the pricing for Asia by US$2.95-5.50/barrel; lowering the price for the Mediterranean by US$0.70-4.50/barrel; and raising the price for oil in the United States by US$2.50-US$4.50/barrel. US$4.20/barrel. Saudi Arabia repeatedly delayed announcing the official selling price for May last Monday, raising concerns that if the agreement fails, Saudi Arabia will start a price war again.
Oil prices are expected to rise to US$25/barrel in the second quarter
In After the agreement was reached, ING commodity strategist Warren Patterson also believed that the production cuts were not enough to eliminate excess supply in the crude oil market in the second quarter. However, he believes that although oil prices are at risk of continuing to decline in the short term, the market bottom may be higher. Brent oil prices are expected to increase to US$25/barrel in the second quarter from the previously forecast US$20/barrel.
Considering the scale of production cuts throughout this year and the production cuts of the United States and other countries under market conditions, Patterson said, “The outlook for oil prices in the second half of this year now looks more constructive. If demand picks up in the second half, it will contribute to a large reduction in inventories.” Therefore, ING lowered its third-quarter Brent oil price forecast from US$35 per barrel It was revised up to US$37/barrel, raising the forecast for the fourth quarter from US$45/barrel to US$50/barrel.
“Obviously, demand remains the main uncertainty and risk to this forecast. If travel restrictions and national restrictions on the movement of people continue into the second half of the year, this may slow the growth of the economy in the second half of the year. Half-year demand recovery,” Patterson noted. According to ING’s forecast, average daily crude oil demand may decrease by 15 million barrels in the second quarter.
At the same time, analysts also doubt whether all parties will comply with the production reduction agreement. “OPEC+ has agreed on historic production cuts, now we have to see if they stick to it.” PattersonIt was pointed out that previously, when the implementation of the production reduction agreement by some members within OPEC+ was lower than the planned level, Saudi Arabia was mainly responsible for the task of excess production reduction to reach the overall planned level. But now, given the current level of production cuts, it will be difficult to see Saudi Arabia cutting more than enough to make up for the shortfalls of other countries.
Global production cuts may exceed 20 million barrels per day
A Abdulaziz bin Salman said Saudi Arabia’s crude oil production will fall to 8.5 million barrels per day in May and June from 12.3 million barrels per day in April. In addition, due to increased production in April, Saudi Arabia, the United Arab Emirates and Kuwait will voluntarily reduce production beyond the agreed quota. As a result, the entire OPEC+ production reduction will reach 12.5 million barrels per day.
According to the statement issued after the OPEC+ meeting, Saudi Arabia and Russia will each reduce production by 2.5 million barrels per day at the level of 11 million barrels per day, and other parties will reduce production by October 2018. Monthly production was reduced by 23% from the baseline. Among them, the United Arab Emirates reduced production by 720,000 barrels per day, and Kuwait reduced production by 640,000 barrels per day.
“Although the 9.7 million barrels/day giant production cut agreement claims to reduce production by 12.5 million barrels/day from April levels, in fact this is only less than Average production fell by 7.2 million barrels per day in the first quarter,” Goldman Sachs wrote in a statement.
Under the impact of the new crown epidemic, OPEC+ is also pursuing other production reduction efforts. The International Energy Agency (IEA) stated that its member countries will purchase a large amount of crude oil as strategic reserves, and the specific purchase scale will be announced on April 15. The United States, India, Japan and South Korea confirmed they would increase their reserves. Abdulaziz bin Salman said that IEA members will add 200 million barrels to their reserves in the coming months.
In addition, there is news that Brazil, Canada, Indonesia, Norway and the United States will reduce production by an average of 4 million barrels to 5 million barrels per day. The United States has previously stated that it will not require shale oil companies to reduce production due to antitrust laws, but due to the impact of falling oil prices, production is expected to drop by about 2 million barrels per day this year.
Why does the United States reduce production for Mexico?
Unlike threatening Russia and Saudi Arabia with the “big stick” of tariffs and sanctions, Trump is surprisingly gentle towards Mexico. Last week, when Mexico was criticized by other OPEC+ members for refusing to accept production reduction quotas, Trump unusually expressed that he understood the difficulties faced by Mexico and was willing to share Mexico’s production reduction tasks.
Yue Yunxia, director of the Economic Office of the Institute of Latin American Studies at the Chinese Academy of Social Sciences, pointed out to a reporter from the 21st Century Business Herald that the United States came to Mexico’s rescue when the negotiations reached a deadlock. The first reason was the United States itself. . She analyzed that the continued decline in oil prices has had a serious impact on the U.S. shale oil industry. If oil prices continue to collapse, it will not only further put the highly leveraged U.S. shale oil companies under further pressure, but may also transmit risks to the financial industry. , which is undoubtedly adding insult to injury to the current U.S. economy.
After the agreement was reached, Trump wrote on social media that the agreement reached between the United States, OPEC and major oil-producing countries The crude oil production reduction agreement “will save hundreds of thousands of jobs in the U.S. energy sector.”
The U.S.’s help is also related to the improvement of U.S.-Mexico relations and the degree of economic integration in North America. Although people still have the impression that Trump forced Mexico to sign a new trade agreement and build a border wall after taking office, Yue Yunxia pointed out that since the signing of the U.S.-Canada-Mexico Free Trade Agreement (USMCA), the three North American economies have already had Very high correlation. In June last year, Mexico became the first country among the three countries to ratify the agreement.
Yue Yunxia pointed out that due to falling energy prices and setbacks in international demand, Mexico’s economy will be very difficult this year. According to predictions by international institutions, the country will experience significant negative growth this year. The reason why Mexico only accepts a production cut of 100,000 barrels per day is because the country’s economy is highly dependent on the oil industry. If production is significantly reduced, it will make the shaky economy even more dangerous.
“If the Mexican economy experiences a major recession, it will also be detrimental to the North American Free Trade Area.” Yue Yunxia said, “Therefore, even if the United States and Mexico still have some disputes, In the context of highly integrated North American economies, helping Mexico is also helping the United States itself.”</p
