OPEC, allies to cut oil by 10m bbl/day for two months – reports

HOUSTON (ICIS)–OPEC and its allies agreed on Thursday to cut oil production by 10m bbl/day for a two months, according to the American Petroleum Institute (API) and media reports.

OPEC had yet to publish an announcement on whether it reached an agreement with its allies. The group met earlier on Thursday, with representatives from the 13 OPEC countries and the 10 allies, led by Russia.

The Wall Street Journal reported that Russia and Saudi Arabia reached an agreement in principle to cut production.

Under the deal, Saudi Arabia will cut production by 3.3m bbl/day from its current level of 12m bbl/day, the Wall Street Journal reported. Russia will cut 2m bbl/day from its current output of 10.4m bbl/day.

In total, the delegates agreed to cut production by 10m bbl/day in May and June, the Wall Street Journal reported, quoting OPEC country officials.

Reuters reported the same figure, attributing it to a statement from the group.

OPEC and its allies would then maintain cuts of 6m bbl/day until April 2022, the Wall Street Journal reported.

The agreement would replace one that lapsed on 31 March, which allowed OPEC and its allies to produce oil without constraint.

The agreement ended as the coronavirus (Covid-19) was spreading throughout the world after breaking out of China.

Countries have imposed travel and work restrictions that have caused demand for transportation fuels to collapse even as the world’s oil producers prepared to produce crude without limit.

Prices for oil fell from more than $60/bbl at the start of the year to less than $30/bbl. Markets rebounded as the prospect grew that the two sides could reach a deal.

Despite the unprecedented magnitude of the latest agreement, it may not be enough to alleviate the pressure caused by the glut in oil.

Many fear that the world will run out of places to store the oil, even with the latest agreement to reduce production by 10m bbl/day.

In the US, Texas, the nation’s largest oil producer, has discussed the possibility of limiting oil production for the first time in half a century, which could buy the world time to find more storage.

The Texas Railroad Commission (TRC), which regulates the oil industry, has scheduled a meeting for 14 April to hear from experts about the implications of imposing production restraints.

It is unclear if such restrictions would receive enough support to pass.

The Texas Alliance of Energy Producers expressed concerns about such limits. The group is the largest state oil and gas association in the US.

Oil prices are important to the chemical industry because prices for chemicals and plastics tend to follow them with a six-month lag, according to the ICIS Petrochemical Index (IPEX). The index tracks 12 major petrochemicals and polymers.

For US chemical producers, lower oil prices can shrink their margins because they rely overwhelmingly on ethane and other natural gas liquids (NGLs) as feedstock. Much of the world relies on oil-based naphtha.

US producers lose their cost advantage when naphtha prices fall in relation to ethane.

Thumbnail image by Shutterstock

Visit the ICIS coronavirus topic page for analysis of the impact on chemical markets and links to latest news.