OPEC+ Agrees to Production Cut

(Global) Tentative Deal for 10 Million Barrel Per Day Reduction

The OPEC+ group of oil producing nations have reached a draft agreement to cut output but 10 million barrels per day, promising positive momentum for oil prices.
The oil and gas sector has been battered by plunging oil prices over the last two months, as tensions between key OPEC+ members Russian and Saudi Arabia threatened to send prices even lower.

“In view of the current fundamentals and the consensus market perspectives, the participating countries agreed to … adjust downwards their overall crude oil production by 10 million barrels per day, starting on 1 May 2020, for an initial period of two months,” OPEC said in a statement.

Supply Surplus

Russia and Saudi Arabia had pledged to ramp up production following failure of talks at the start of the year. Previous agreements within the wider OPEC+ consortium, designed to limit production, ended in March, paving the way for a flood cheap oil. Crude prices had fallen from over US$60 in January to about US$25 per barrel at the end of March.
“A 10-million \-barrel-per-day reduction may seem small compared with some very high demand loss estimates, but if the curbs are implemented? It would slow the buildup in storage and avoid the surplus of supply over the second quarter, when the Covid-19 shutdowns are the extensive and demand lowest,” said Ann-Louise Hittle, of analyst firm Wood Mackenzie.

Breakbulk operators working in the oil and gas industry had been expected to bear the brunt of many losses, as all but the most mature, low-cost projects are likely to be postponed in a sub-US$20 per barrel regime.

Demand Weakness
While the new OPEC+ agreement remains only a draft proposal, the signal that oil producers may be looking to end the standoff has created positivity for the sector.

“A 10-million b/d cut would be very supportive of price over the second quarter. Even a 5-million-barrel-per-day reduction would see oil prices in the low US$30s. It would ease pressure on storage and stem the steep price collapse we saw in March,” Hittle said.

Despite the potential respite from the supply side, the oil and gas sector continues to face a record slump in demand, adding question marks to planned investment going forward.
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