Crude Oil Production Agreement

Benchmark Brent crude climbed friday to a three-month high, above 42 $US a barrel, after plunging below 20 $US in April. Prices remained one-third lower than at the end of 2019. One of the risks is that after the worst end of the pandemic, the recovery of the global economy will prove more difficult than investors expect today. While production cuts and voluntary oil well closures have helped rebalance demand and supply, huge oil reserves remain in reservoirs and on ships that could flood the market. Saudi Arabia, the de facto leader of Opec, and Russia must do a balancing act by driving up oil prices to cover their budgetary needs without pushing them well above $50 a barrel, which would promote a resurgence of rival US shale production. In accordance with the initial agreement reached on April 12 was met by the combined group of producers, known as OPEC Plus, production is expected to increase gradually after June. “Each of the 23 countries represented here must be vigilant about signs of a setback from its commitments,” he said at the second meeting. And he warned that production would be closely monitored. For many market participants, this is good news, given the considerable uncertainty facing oil markets in the context of a prolonged period of global oil glut, declining demand related to COVID-19 and uncertainty in the global economy. The extension of the production cut also restores market confidence that Saudi Arabia and Russia have committed to stabilizing oil markets and enforcing the market within OPEC+.

Now the world is waiting to see how slate producers in the United States react. Will they start or follow production? Analysts have argued that OPEC+ may decide to extend the current production cuts of 7.7 million barrels per day until next year, instead of following the initial terms of the April agreement and easing them to 5.7 million barrels per day. There have also been reports that Saudi Arabia, Russia and others are considering reversing the cuts in response to the recent drop in oil prices. Independent oil market analyst Gaurav Sharma told the BBC that Sunday`s deal was “slightly lower” from the 10 million barrels a day initially announced on Thursday. Mexico had committed to these production cuts, which delayed the signing of the agreement. The group, known as Opec+, also asked countries like Nigeria and Iraq, which had exceeded production quotas in May and June, to compensate with further cuts between July and September. On April 12, OPEC+ agreed to a record reduction in oil production of 9.7 million barrels per day in order to stabilize oil markets. The OPEC+ deal in April shook oil markets and set the following production cuts: in addition to continuing the current production cuts until July, the deal also shows that OPEC+ is focusing more on member states` compliance with agreed cuts. The OPEC+ Joint Ministerial Oversight Committee will meet monthly to verify compliance with agreed production quotas.

Countries that overproduce their quota in May and June must compensate with corresponding reductions from July to September 2020. Opec, Russia and its allies have agreed to extend record cuts in oil production until the end of July, extending a deal that has helped double crude prices over the past two months by taking nearly 10 percent of global shipments off the market. The OPEC+ Joint Technical Committee, which oversees oil market conditions, will meet on June 17 to closely monitor market developments. The next scheduled OPEC+ meeting is scheduled for November 30; However, OPEC+ is ready to take decisions sooner if circumstances warrant. Members will review the agreement in December 2021 with a view to a possible extension. OPEC+ could change the terms of its agreement to cut oil production if pact members agree, Saudi Energy Minister Abdulaziz bin Salman was quoted as saying by Reuters today. This contributed to the drop in oil prices in late April, with West Texas intermediate crude, the U.S. standard, falling into the negative range, while Brent crude oil, the international benchmark, briefly fell below US$20 a barrel. . .

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