OPEC+ has agreed to remove 9.7 million bpd of oil from the market, OPEC said in a press release Sunday, with the cuts beginning next month and remaining in effect until the end of June, after which the group will start to ramp up production gradually.
From 9.7 million bpd in May to June, the cuts will decline to 7.7 million bpd for the period July to December 2020, and then further to 5.8 million bpd until the end of April 2022.
OPEC and its partners led by Russia had been discussing the cuts for four days with all big players agreeing to cut deep. Somewhat surprisingly, however, Mexico refused to sign up for a cut of 400,000 bpd like OPEC+ had asked. The country, which is not part of OPEC but is part of OPEC+, said it would only cut 100,000 bpd from its daily production, throwing a wrench into the works of the agreement.
Then, on Friday, Mexico said it had struck a deal with the United States to pass on to it most of the cuts. Mexico’s President Andres Manuel Lopez Obrador said he had spoken with U.S. President Donald Trump on Thursday and the United States agreed to cut 250,000 bpd for Mexico to help it reach the 400,000-bpd cut OPEC+ is asking of it, the Mexican president said at a news conference on Friday, noting that he had informed OPEC+ of this development.
Previously, OPEC+ had agreed in principle cuts of 10 million bpd, with Saudi Arabia and Russia contributing the most, from a baseline level of 11 million bpd. The rest of the members of the group would cut from a baseline level equal to their average daily output rate from October 2018. However, prices have failed to respond as many have expected.
Although Brent crude and WTI improved on the news, the improvement was modest because although historically high, the agreed cuts fell short of expectations based on the loss of demand, which some have estimated at 30 million bpd. Since it is unrealistic to expect producers to remove 30 million bpd of oil from markets even for a month, the reaction of prices was expected.
By Irina Slav for Oilprice.com
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