G20 Countries Agree to Take Measures to Stabilize Oil Market

The G20 Energy Ministers, accounting for 85% of the world's gross national product and 75% of world trade, agreed on April 10 to "take all necessary and immediate steps to ensure the stability of the oil market" after more than twenty countries of the format OPEC +, some of which is also part of the G20, agreed on Thursday on specific stages and quotas for reducing production.

The decision of the energy ministers of the G20 countries was made late in the evening in the form of a communiqué amid a decrease in the standard grade of Brent oil to about $ 22 / barrel (almost three times less than the figure at the beginning of the year), but many analysts believe that when opening world oil trading platforms after Catholic Easter oil price may rise.

“Even if the OPEC + and G20 agreements are poorly implemented, these agreements are very significant and will be important for the market,” says Wood Mackenzie spokeswoman Anna-Louise Hittle.

IHS Markit expert Roger Divan noted that “finally, reality and pragmatism have come, and the parties have begun to reduce, which is 7 times more than what was during the financial crisis of 2008-2009.”

In addition, U.S. President Donald Trump finally began to work with OPEC, which he had previously pressed, and became a direct intermediary for the OPEC + video conference on April 9 and G20 on April 10, supporting his long-time partner Saudi Arabia, who is currently chairing the G20.

Moreover, Trump made a tricky move, declaring that he was ready to take on part of Mexico’s obligations, which, within the framework of OPEC +, did not agree to the proposed reduction of 350-400 thousand b / d, but spoke only about 100 thousand b / d , which jeopardized the historical OPEC + agreement.

The United States, which did not want to make tough commitments under OPEC +, announced on April 10 that it would take on 250,000 bpd of Mexico’s recommended obligations, and in exchange for this, according to Trump, “the United States will help Mexico and it will refund us later when it’s ready to do it.”

Anas Al-Haji, an Arab expert on energy markets, said on his Twitter account that to understand this situation, you need to remember who owns the major refineries in Mexico.

It is worth noting that production in North America is already falling both due to the collapse in oil prices, and naturally. So, from 13 million b / d in the United States, production in 2020 may decline to 11-10 million b / d.

The United States and Canada, during the consultations on April 9-10, did not reach the point of restricting production decisions at the level of their governments, but indicated that private oil companies in the United States and Canada are cutting capital expenditures on a large scale and need help.

Canada previously said it could cut its oil production by a maximum of 0.5 million bpd.

It is noteworthy that the United Kingdom during the consultations on April 10 stated that the situation on the world oil market is not so threatening, but in the end agreed to think about its own steps in stabilizing world oil prices.

Norway has also agreed to think about a possible slight reduction in production, which is neither part of OPEC nor the G20.

Note that world oil demand fell by about a third as many of the world's largest economies were forced to stop trying to hinder the spread of the Corona Virus.

As a result, oil prices fell to their lowest level in 18 years, while oil supply was three times higher than demand. The general situation threatens millions of jobs in the energy sector and several other sectors of the economy.

Against this backdrop, the United States, Russia and Saudi Arabia - the three largest oil producers in the world - decided to coordinate their actions in order to catch up.

As Russian Energy Minister Alexander Novak said on April 10, “the role of the G20 is to comprehensively support these efforts and the efforts of OPEC +.”

Saudi Arabia's Crown Prince Mohammed bin Salman spoke on Friday night with Russian President Vladimir Putin and the US President and said the parties reaffirmed the importance of cooperation between oil producers.

At the same time, on April 10, at an emergency online meeting of G20 energy ministers, the head of the International Energy Agency Fatih Birol noted that “no one should console themselves with the thought that the measures agreed by oil producing countries provide a quick solution to world oil prices.”

“But the actions of the countries will help eliminate the imbalance in the oil market that arose in March and continues to date and smooth the curve,” Birol said.

Oil traders were skeptical on Friday, believing that supply cuts would therefore occur regardless of any transaction, since oil storage facilities around the world (total capacity above 1.2 billion barrels) are already close to full.

In addition, if you reduce production and stop the wells, then in the future, taking into account the technological features of a number of fields, these wells will be difficult to restart.

The most difficult period for the promised reductions is scheduled for May-June 2020, and in summer there will be the most important analysis of the effectiveness of the new OPEC + deal.

“The G20 countries agreed in September 2020 to discuss the impact of the new Corona Virus pandemic and the situation on the energy markets, but if necessary, hold a meeting earlier,” the communiqué said after a meeting of the heads of energy departments of the G20 countries.

The ministers also agreed to create a coordination group, which will monitor the oil market. Recall that the G20 virtual energy conference took place immediately after the extraordinary meeting of the OPEC + countries, which on the eve agreed to jointly reduce production for a period of 2 years.

Starting May 1, OPEC + countries will have to reduce production by a total of 10 million b / d (the Russian Federation and Saudi Arabia will take half of this volume upon themselves), after July the quota will decrease.

OPEC expected large oil exporters from the G20 to reduce production by at least 5 million bpd by the efforts of the United States, Canada, Brazil and Norway, but as a result, quotas for them have not been clarified.

Surprisingly, the discrepancies in assessing how the pandemic affected the oil market also became an obstacle in the negotiations on April 10.

The figures voiced by OPEC did not convince everyone at the G20 conference, and some European countries advocated softening the rhetoric in the final text of the communique so as not to dramatize the situation.

This is all the more strange since G20 countries account for up to 70% of world oil production and up to 80% of its consumption.

But an important step will already be that during May-June, OPEC + will eliminate 10% of the oil supply from the market, which can still slightly increase the price of “black gold”, on which the budgets of many states depend, including Azerbaijan.