By Adedapo Adesanya
Crude prices reacted positively to the news of the decision of the Organisation of the Petroleum Exporting Countries (OPEC) and its allies known as OPEC+ to reduce the global crude supply by 7.7 million barrels per day initially agreed when the deal was signed in April.
On Wednesday, an OPEC committee held a virtual meeting, where talks about the possibility of extending the reduction of crude production by 9.7 million barrels per day till August came up.
In April, when prices were down, oil producers held a meeting and it was agreed that supply should be reduced by 9.7 million barrels per day in May and June and then by 7.7 million barrels per day from July to December.
However, seeing the positive effect of this action, members of the group agreed to extend the 9.7 million barrels per day supply cut till July.
After news broke yesterday that the initial agreement would be maintained, the price of the Brent crude futures went up by 75 cents or 1.75 per cent to $43.65 per barrel, while the US West Texas Intermediate (WTI) crude futures rose 69 cents or 1.71 per cent to $40.98 per barrel.
With this decision, OPEC and its allies will restore some oil supplies next month but added that the impact will be barely felt as demand recovers from the coronavirus crisis.
After almost three months of historic output curbs, the 23-nation coalition led by Saudi Arabia and Russia will proceed with its plan to gradually taper the reductions.
The decision was widely expected but still created worries about the demand side of the market after a resurgence of the coronavirus in the US, the world’s largest oil consumer. The new cases have led to closing down of establishments in some cities.
Speaking at the OPEC+ video conference on Wednesday, Saudi Energy Minister and chair of the meeting, Prince Abdulaziz bin Salman said, “As we move to the next phase of the agreement, the extra supply resulting from the scheduled easing of production cuts will be consumed as demand continues on its recovery path.”
“Economies around the world are opening up, although this is a cautious and gradual process. The recovery signs are unmistakable,” he added.
The oil cabal and its allies will withhold 7.7 million barrels a day from the market in August, compared with cuts of 9.7 million currently.
The group’s two largest members, Russia and Saudi Arabia, publicly backed the move, and other ministers participating in the video conference had agreed in principle, according to sources.
Business Post understands that this supply increase will be offset by members that didn’t fulfil their commitments to reduce output in May and June – such as Iraq and Nigeria.
Both countries have said they will make up for those shortcomings with extra reductions in August and September.
Those compensation cuts are a crucial principle and the group must resist the temptation to relax, Prince Abdulaziz said.
On his part, the co-chair of the alliance and Russian Energy Minister, Mr Alexander Novak said the tapering of production cuts is fully in line with the current market trends.
“Almost all of the output hikes will be consumed in domestic markets of the producing countries as the demand is recovering,” he said
The group, however, said it would only consider calling an emergency meeting to reverse the easing of its cuts if severe economic lockdowns return.
