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OPEC and its oil-producing allies agreed on Saturday to extend the group’s historic production cut for another month in a continuing effort to balance the global oil market. The deal was finalised during the group’s video conference.
“Today we have reason to be cautiously optimistic about the future, but we are not out of the corner and the challenges ahead remain to be seen,” Saudi Arabia’s Energy Minister Prince Abdulaziz bin Salman said in the OPEC+ meeting. He urged unity in the group and a quick decision.
Beginning on May 1, the alliance cut production by 9.7 million barrels per day. The cuts were initially expected to begin on July 1.
Now, July’s production cut will be 9.6 million bpd after Mexico, which accounts for 100,000 bpd, said it remained committed to the group’s prior agreement.
The cuts will be reviewed on a monthly, with the next meeting scheduled for June 18.
A persistent problem for OPEC+ is that some countries are not abiding by the prescribed quotas, and Saturday’s agreement is contingent upon greater levels of compliance. Countries that fail to meet quotas will have to cut production further in July, August, and September to make up for cuts in May and June.
Ahead of the meeting, the oil market displayed optimism over an agreement. On Friday West Texas Intermediate jumped 5.72% to settle at $39.55, while international benchmark Brent crude gained 5.78% to settle at $42.30. It was each contract’s sixth straight week of gains, and the highest settlement since March 6.
Under the prior agreement, which was set during an extraordinary multi-day meeting in April, the 23-member group began curbing production by 9.7 million bpd on May 1, which was slated to extend through the end of June. The cuts would then begin to taper. From July through the end of 2020, 7.7 million bpd would be taken offline, followed by 5.8 million bpd from January 2021 through April 2022.
As a result of the coronavirus pandemic, oil demand has fallen sharply, which is the largest reduction in production in history. The International Energy Agency estimates that about a quarter of demand was cut in April as billions of people around the world stayed home to slow the spread of COVID-19. The shock came as producers continued to pump more oil, sending WTI into negative territory for the first time on record and Brent to a 20-year low.
Since then, prices have risen steadily as the economy has started to reopen and producers have reined in production further. In the U.S., production has fallen from a record 13.1 million bpd in March to 11.2 million bpd, according to the U.S. Energy Information Administration. WTI is still about 40% below its January high of $65.65, however.
“Although small in scale, this cut is however important in squaring the group’s strategy, which has this year alone swung from price-focused cuts, to market-share recapture, to internal price war to finally a record large cut,” Goldman Sachs’ Damien Courvalin wrote in a note to clients Friday.
The closely watched meeting was initially scheduled for June 9-10.
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