OPEC + historic agreement open to all oil producers

Baku/10.04.20/Turan: On April 9, after 11 hours of discussion, the 23 countries of OPEC and non-OPEC adopted a new “Declaration of Cooperation”, which provides for a three-stage reduction in oil production from the level of 2018 over 2 years. Mexico participating in the webinar took a timeout, but this was reflected in the Communiqué following the video conference and the Declaration will enter into force if Mexico agrees with the proposed reduction. For Mexico, a reduction of 400-320-240 thousand barrels per day (three steps) was proposed, but so far, it has agreed to 100 thousand. With the exception of Mexico, other OPEC + countries agreed to reduce the daily oil production by different, corresponding volumes in three stages.

If the “Declaration of Cooperation”, OPEC-countries will reduce their total daily production in May-June by 10 million barrels, or 23% from the level of October 2018; and OPEC member countries - by 6.085 million barrels per day, countries not included in the Cartel, but supporting the OPEC + format - by 3.915 million barrels per day.

It is very important that these quotas include only crude oil (non-condensing), which previously lobbied for the Russian Federation and a number of non-OPEC member countries, including Azerbaijan, which makes these agreements attractive. Azerbaijan also made new commitments to OPEC + in order to balance the world oil market and stabilize oil prices. In October 2018, Azerbaijan produced an average of 718,000 barrels of crude oil per day. The country agreed for May-June to reduce production by 164,000 barrels from this level in accordance with the new OPEC + agreement. That is, during this period, Azerbaijan should maintain a daily production of crude oil (non-condensing) at 554,000 barrels.

As for the other stages of production decline for the parties to the new deal, in July-December 2020, it was decided to reduce the daily oil production at OPEC + by 8 million barrels or 18% from the level of October 2018. Thus, the daily quotas for OPEC countries will amount to 4.868 million barrels, and for non-OPEC countries - 3.132 million barrels. During this period, Azerbaijan needs to keep daily production at a level no higher than 587,000 bar/day. In March 2020, crude oil production in Azerbaijan amounted to 683.7 thousand bpd.

ASTNA was informed by an informed source in SOCAR that out of this volume, 520 thousand bps is from the key block of Azeri-Chirag-Guneshli fields. Thus, both SOCAR and ACG should expect a decrease in oil production under the new OPEC + deal. The Declaration of Cooperation states that from January 2021 to April 2022, daily oil production for OPEC + member countries will be reduced by 14% from the level of October 2018 or by 6 million bps. During this period, daily quotas for OPEC countries will amount to 3.651 million barrels, for countries not OPEC - 2.394 million barrels. Azerbaijan can keep production at the level of 620,000 b/s during this period.

It is important that Canada, Norway, Argentina, Brazil, Colombia, Indonesia, Egypt, Chad, Trinidad and Tobago participated in the videoconference for the first time.

KEY PLAYERS

The new OPEC + agreement may become historic, as OPEC last time went for a one-time reduction in production by only 2.2 million bpd in the crisis year of 2008. However, the coronavirus pandemic that swept the whole world in 2020 reduced demand for oil by 30-35 million bps, while in March this year, total production worldwide reached 100 million bps. Oil refineries in the world have practically stopped buying oil, oil storage facilities are full, large-capacity tankers (25 vessels) run without ports of registry as oil storage facilities. All this demonstrates a tremendous excess of oil supply before demand for it, and requires serious measures.

Saudi Arabia (the largest oil producer in OPEC) and the Russian Federation (the largest oil producer outside OPEC, but participating in consultations in the OPEC + format) have special conditions in the transaction.

As follows from the communique of the meeting on April 9, for Russia and Saudi Arabia, the reference levels are determined separately - 11 million b / s (not related to October 2018). So, Saudi Arabia will reduce oil production to 8.5 million b / s (in April it produces 12-12.3 million b / s, and compared with the current level, its decline will be 3.5-3.8 million b / s , and compared with March - 1.2 million b / s). Russia in April produces 11.3 million b / s of oil along with condensate (and without it, 1 million b / s less), but already in May it will also produce 8.5 million b / s. All participants in the video conference agreed to repeat such a meeting on June 10, 2020.

It is noteworthy that on April 9 it was decided that Iran, Libya and Venezuela might still not reduce production (they are under US sanctions). Many analysts praised the April 9 agreement. The head of the Russian private equity fund, Kirill Dmitriev (one of the initiators of the Russian deal with OPEC), said that without a new agreement, the price of oil would have fallen to $ 10 / barrel or even lower. He also called important the interest in consultations from Canada and Brazil, which could reduce oil production by 0.5 million b/s each.

The United States did not officially participate in the webinar on April 9, but it was Trump, who initiated such a meeting, because at oil prices of about $ 20 / bar, the US economy began to experience problems, threatening job losses for 10 million people. The countries of North America will clarify their position on reducing oil production on April 10 during the webinar of G20 energy ministers (G-20). Since December 2019, the United States has experienced a natural decline in shale oil production, and in 2020 it may reach 1.7-2 million b/s.

Meanwhile, Goldman Sachs and UBS believe that even an unprecedented reduction in production by 10 million bps in the current economic conditions in the world against the backdrop of COVID-19 may not be enough. Nevertheless, the International Energy Agency expects oil-importing countries to announce plans for oil purchases for their strategic reserves this week, which will revive demand. A number of US oil producers are planning on April 14 to discuss possible production restrictions. US senators have urged the White House to introduce import tariffs on oil, but Trump has not yet done so.

Outside OPEC + oil-producers, also called upon to help achieve a balance in the global oil market, are Norway, Ecuador, Colombia, Argentina, Egypt, Indonesia and Trinidad and Tobago. Speaking at a meeting on April 9, OPEC Secretary General Mohammad Barkindo said that "now there are no economic sectors in the world that are not affected by the unprecedented situation with COVID-19."

“In March, the fundamental indicators of supply and demand were completely turned upside down on the oil market ... Just a month ago, at meetings in Vienna; global GDP growth expected by 2020 was 2.4%. Today it is negative 1.1%. The global contraction of the world economy is much larger than during the Great Recession of 2008-2009. The growth in oil demand in the second quarter is approaching 12 million barrels per day and this is unprecedented. OPEC Reference Basket fell from $ 52.7 / b in March 2020 to below $ 20/bar in early April, and the budgets of oil-producing countries began to receive less revenue,” said the Secretary General of OPEC.

He added that “all OPEC + producers and other countries should recall the serious imbalance of the 2014-2016 market, when oil producers lost trillions of dollars in lost revenue, and globally, more than 1 trillion dollars was lost in terms of investment.”

That is why it is extremely important that the parties took urgent measures on April 9.

Today, April 10, this situation will be discussed by the energy ministers of the G-20 countries in the afternoon. —0—