OPEC, allies reduce oil-cut target for the life of the agreement

HOUSTON (ICIS)–OPEC and its allies (OPEC+) reduced the target of its oil-cut agreement by 300,000 bbl/day to 9.7m bbl/day for May through June.

The group announced the cut on Sunday, and it marks a retreat from its more ambitious 10m bbl/day target that OPEC+ announced on 9 April.

The group also agreed to reduce the size of the production cuts for the life of the multi-year agreement.

From July through December 2020, the production cuts will total 7.7m bbl/day versus the earlier reduction of 8m bbl/day.

From January 2021 through April 2022, they will total 5.8m bbl/day, versus the earlier cut of 6m bbl/day.

The lower targets indicate that OPEC gave in to the demands from Mexico, one of the allies of the cartel.

That nation’s president, Andres Manuel Lopez Obrador (AMLO), said that Mexico balked at OPEC’s initial request that the country reduce production by 400,000 bbl/day.

Lopez Obrador demanded that Mexico’s target should be 100,000 bbl/day and not 400,000 bbl/day. The US would make up the difference, he said.

The latest OPEC+ agreement indicates that the group agreed to Mexico’s request, since it lowered the overall target by 300,000 bbl/day.

It is unclear if or how the US could mandate any reductions in oil production. Individual states have more flexibility, and nation’s largest oil producer, Texas, will hold a hearing about imposing such production cuts on 14 April.

The updated OPEC+ agreement held some other key differences to the older one.

Earlier, the group would “call upon all major producers to contribute to the efforts aimed at stabilising market”, OPEC said.

Now, OPEC+ will “call upon all major producers to provide commensurate and timely contributions to the efforts aimed at stabilising the oil market”.

The change indicates that the OPEC+ members might have more flexibility in meeting their production-cut commitments.

Regardless of the changes in the updated agreement, OPEC Secretary General Mohammad Barkindo said, “These production adjustments are historic. They are the largest in volume and the longest in duration.”

He added, “Together with all participating countries in the OPEC and non-OPEC [declaration of cooperation] as well as other producers, have turned a new historic page in the world of oil,” Barkindo said.

He noted that the agreement has paved the way for a global alliance with the participation of the Group of 20 (G20).

Barkindo did not specify the nature of such participation or if producers outside of OPEC+ are participating in any of the agreed production cuts.

On Monday, Brent oil futures had traded at $31.75/bbl, up slightly from their close on Thursday of $31.48/bbl.

DEAL COMES AMID PRICE COLLAPSE
OPEC and its allies reached the agreement as oil markets contend with concurrent supply and demand shocks.

The demand shock came as a result of the coronavirus. Demand for transportation fuels has crashed because countries have adopted travel and work restrictions to limit the spread of the disease.

The supply shock came after talks to renew an earlier OPEC+ agreement collapsed. That collapse led to a price war among the major oil producers.

Brent futures started the year above $60/bbl and approached $20/bbl before the two sides resumed talks.

The large decline in oil prices has caused several companies to lower capital expenditures (capex).

Oil-services company Baker Hughes approved a plan to lower capex by more than 20% this year.

Its first-quarter earnings took a $1.8bn hit. Baker Hughes expects to record a non-cash goodwill impairment charge of $15bn during the first quarter.

Despite the charges, Baker Hughes said it continues to maintain what it described as solid financial strength and liquidity.

An oil-and-gas producer, SilverBow Resources, suspended drilling and completions. It lowered its capex programme by 55% from its previous guidance.

It remains to be seen whether the market-driven cuts and the mandated OPEC+ reductions will be large enough to prevent the world from running out of oil storage.

Many have warned that this could happen in parts of the world, putting more pressure on oil prices.

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.

Focus article by Al Greenwood

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