Saudi Oil Minister Abdulaziz bin Salman told participants at Saturday’s virtual OPEC meeting “we all have made sacrifices to make where we are today.” He said remained shocked by U.S. oil futures having fallen below zero for a few days in April -- a phenomenon that needs to be avoided from repetition.
UAE oil minister Suhail al-Mazrouei called the OPEC’s latest move a “courageous decision,” but market observers are uncertain if the limited extension of production cuts is deep enough to avoid prices from falling so low that it creates a global financial risk.
Saudis aim to keep prices below $50/bbl
Saudi Arabia, OPEC dominant member state, and Russia are trying to push up prices meet their budget needs and stabilize them around $40-45/bbl. At the same time, they want to avoid driving prices much above $50/bbl as to not incentivize a rebound in rival U.S. shale production.
“Lower oil prices, if sustained, are bad news for highly responsive US oil companies, but we are unlikely to see an impact on output growth until later in the year,” analysts at the International Energy Agency (IEA) commented.
Shale oil and gas fracking in North America is very sensitive to price. Latest projections by the U.S. Government see Brent crude oil prices average $34/b in 2020 and in this event exploration & development spending could fall to less than $10 per barrel of oil equivalent (boe).
Iraq, Nigeria failed to comply with initial cuts
Eager to prop up prices, OPEC+ had initially agreed in April to cut supply by 9.7 million barrels per day (bpd) during May-June. Those cuts were meant to taper to 7.7 million bpd from July to December.
However, these supply cuts proved not steep enough to balance the plunge in demand caused by the coronavirus pandemic. Moreover, there was a lack of compliance of members like Iraq and Nigeria with the reduced production quota. Saudi Arabia is now adamant to enforce compensations in the coming months.
Demand is now recovering, albeit slowly. Though lockdowns to contain the spread of the virus have been lifted in several major economies across Asia and Europe, excess oil production keeps weighing down prices as global aviation remains largely grounded.