CORRECTION: OPEC+ at Brink of Ending Oil Price War, awaits G20 Meeting for OPEC++ Deal

Content provided by APO Group. CNBC Africa provides content from APO Group as a service to its readers, but does not edit the articles it publishes. CNBC Africa is not responsible for the content provided by APO Group.

In a move to save the oil industry — facing the biggest crisis in its history — OPEC and Russia have agreed on new production cuts, with the OPEC+ group agreeing to eliminate 10 million barrels of crude per day for an initial two-month period to save a glutted oil market. Mexico is the only country in the extended OPEC+ group to have refused to take part in the cuts at the same level as others — its energy minister Rocio Nahle proposed a reduction in national output of 100,000 barrels per day instead of the 400,000 barrels per day requested.

Though the new OPEC+ deal is not dependent on additional cuts from outside the group to move forward — such as the United States, Brazil and Canada — OPEC+ is hoping for additional cuts from these and other G20 countries.

The OPEC+ production cuts will begin in May but can only proceed if Mexico participates. From July to December, overall production cuts will lower to 8 million barrels per day, followed by 6 million barrels per day from January 2021 to April 2022.

The fate of a new “OPEC++” deal, in which additional countries could sign up to production cuts, will be the focus of a virtual meeting of G20 energy ministers on Friday, with the US Energy Secretary Dan Brouillette among the global energy leaders expected to participate in the webinar. Alberta Energy Minister Sonya Savage was on Thursday’s OPEC+ call, a first for Canada.

The OPEC+ production cuts would just run through June 10, when OPEC+ is set to meet again. Iran, Libya and Venezuela will be exempted. Saudi Arabia and Russia would bear the brunt of the cuts.

Brent crude was down 4 percent at market close, losing pace from a nearly 11 percent rally before the details of the deal were announced. Brent closed at $31.48 per barrel.

Free market or bust?

Thursday’s deal would bring an end to the oil price war between Saudi Arabia and Russia — which started March 8 in an effort to regain market share captured by United States shale oil production in recent years. In moving to end the oil price war, both Saudi Arabia and Russia have called on the participation of global producers outside the OPEC+ group to join production cuts.

That issue is set to be addressed at Friday’s virtual G20 meeting, but the United States has balked at the idea of officially joining cuts, citing an open market and anti-trust laws. However, President Donald Trump has indicated the US — a top oil producer along with Russia and Saudi Arabia — will naturally see sharp declines in oil and gas production with the steep drop in oil prices and drop in global demand. Trump has radically changed his position on OPEC, as the oil market collapse foreshadows a collapse of US shale.

“Obviously for many years I used to think OPEC was very unfair,” Trump told reporters on Wednesday. “I hated OPEC. You want to know the truth? I hated it. Because it was a fix. But somewhere along the line that broke down and went the opposite way. … We have a tremendously powerful energy industry in this country now — No. 1 in the world —and I don’t want those jobs being lost.”

The US shale industry, however, remains sharply divided on official production cuts — with majors like Exxon and Chevron calling for a free market and smaller independents more eager to join production cuts. In 2019, US oil production averaged 12 million barrels per day. But production is now projected to fall by at least 15 percent in the second quarter of 2020 and another drop of 12 percent in the third quarter, according to the EIA. Several companies in the Permian Basin are asking for a hearing with the Texas Railroad Commission, the regulator, to determine mandatory production cuts. As of yet, no such meeting has been called.

Global pandemic coincides with price war

Oil prices plummeted in recent weeks, as the oil price war between Russia and Saudi Arabia, which began on March 8, was amplified by an unprecedented drop in oil demand caused by the COVID-19 pandemic.

About 40 percent of the world’s population has been ordered to stay home to stem the spread of COVID-19, according to the Energy Information Agency, and unforeseen impacts on travel, tourism, manufacturing, and joblessness have since seen global oil demand plummet by about 30 percent, from over 100 million barrels per day to under 85 million barrels per day.

The virtual OPEC+ meeting, in fact, was an indicator of the new reality, as many of the world’s top oil and gas leaders joined the meeting from their home countries.

Brent crude was averaging $55.70/barrel in February, before the oil price war and the impacts of COVID-19 were known. Ahead of the meeting on Thursday, Brent crude was trading at $33.41 and WTI at $25.92. Both Brent and WTI have reached their lowest level in years, with Brent hitting $22.76 per barrel in March, its lowest price since November 2002.

“The global spread of the Coronavirus is creating a demand shock that is impacting already fragile world energy market balances. Markets are continuing to assess the yet unknown risks of COVID-19 to the global economy as the disease continues to suppress economic activity,” said Dr Sun Xiansheng, Secretary General International Energy Forum, in a statement.

As demand for oil and the price of oil has declined, storage capacity is reaching its limits. In just a few weeks, analysts predict oil production may be shut in due to a lack of global storage capacity.

“Low oil prices combined with the inelastic nature of refined product supply and demand is usually a boon to refining margins. However, COVID-19 also impacts downstream profitability caused by erosion in demand. The combination of sustained shocks to supply and demand will cause product inventories to rise to new highs,” Dr Sun continued.

Impact on Africa

Africa has a lot to lose from a sustained low oil price, in addition to the damaging economic impacts of COVID-19. Economic powerhouses like Nigeria and Angola, which reportedly had difficulty selling oil production ear-marked for export in April, could take especially hard hits, made especially vulnerable by a lack of economic diversification.

As a whole, the continent’s oil producers have pushed for cooperation at the OPEC+ meeting, urging for a stabilized oil market and reduction in production.

In a joint statement, the Africa Petroleum Producers Organization called for OPEC and non-OPEC members to cooperate in stabilizing the oil market.

“We reiterate our support to OPEC and non-OPEC member countries as well other global oil producers in their concerted efforts at ensuring long term stability of the global oil market. Furthermore, we urge the G20 countries to offer assistance to Africa as we struggle to ward off this pandemic and price stabilization process in the oil markets,” said H.E. Foumakoye Gado, President of the Council of Ministers of APPO and the Minister of Petroleum of Niger.

H.E. Timipre Marlin Sylva, the Minister of State for Petroleum Resources of Nigeria, also urged for cooperation heading into Thursday’s meeting.

“The driving force of our OPEC policy is first the stability of our national economy as well as the stability of the global economy which is heavily dependent on OPEC and its strategic partners, popularly referred to as OPEC+. Nigeria, like the rest of the world, has been hit by the Global Pandemic, COVID-19, and is prepared to join the rest of the world in making the necessary sacrifices needed to stabilize the crude oil market; and to prevent what is likely to be a major global economic meltdown,” said Sylva.

NJ Ayuk, Executive Chairman of the African Energy Chamber, supported the deal and advocates for further cuts.

“The OPEC deal is a good one. We can work with it for now. African countries will not recover from COVID-19 and the associated economic difficulties without a strong energy sector. The oil industry helped the continent pull itself out of the last economic recession of 2008. African businesses and workers will be happy to see the end to the price war and to maintain an industry that meets their hopes and aspirations. A global cut would be better and everyone needs to put some skin in the game, especially our friends from the US, Canada and Norway.”

South Sudan, a member of the OPEC+ cooperation, backed the production cuts.

“South Sudan believes that market volatility is negative for every player in the market and hurts our ability to attract new foreign investment, diversify our economy and promote peace,” stated Minister of Petroleum Hon. Puot Kang. “South Sudan is focused on boosting exploration and opening up new oil and gas fields, and the current scenario hampers our growth targets significantly.”

The International Monetary Fund is already working closely with African countries to stave off recessions and an economic collapse. Governments throughout the continent are calling for debt relief as the global economic crisis deepens. The World Bank and the IMF have both expressed support for debt relief as less developed economies navigate the COVID-19 fallout.

Distributed by APO Group on behalf of Africa Oil & Power Conference.Media filesDownload logo

Related Content

Distell CEO: What the sale of alcohol under level 3 means for the industry

South Africans can look forward to popping their favourite bottle of bubbly or sipping on a glass of pinotage to warm up from the cold winter. That’s as alcohol sales, that were banned for over two months under the Covid-19 lock-down, will be lifted. Distell CEO Richard Rushton joins CNBC Africa for more.

This Rwandan publisher is creating buzz with new book App

After realising the challenges that come with publishing fellow African writers, home-grown publishing house, Imagine We Rwanda launched their very own mobile app, dubbed, Imagine Books. Fast forward 2 weeks and hundreds of titles have been purchased worldwide and the numbers are only going up. CNBC Africa spoke to the founder, Dominique Alonga for more.

COVID-19: This virtual concert campaign is bringing together African artists for charity

The COVID-19 pandemic has affected livelihoods across the continent and different initiatives have been instituted to support them. One of them is a campaign dubbed “We are one Africa” which aims to sustain various communities and groups through virtual concerts. Project Manager, Andrew Alovi joins CNBC Africa for more.

Kenya’s tech sector unveils video conferencing system

Kenya has recently launched the first made-in-Africa video conferencing system that will enable users to enjoy better quality calls with unlimited attendees, at more affordable prices. The video conferencing system will also enable African countries to retain the fees in local economies, compared to competition that repatriates it off the continent. Jay Shapiro, CEO and Co-Founder of Usiku Games joins CNBC Africa for more.

Subscribe to our newsletter

Sign up for free newsletters and get more CNBC AFRICA delivered to your inbox

More from CNBC Africa

Tsogo Sun Hotels FY profits plunge, COVID-19 lock-downs weigh

Hospitality Group Tsogo Sun Hotels reported a 31 per cent plunge in full year headline earnings per share, with Covid-19 resulting in demand from international tourist retracting in the fourth quarter, due to global lock-downs.

Nampak swings into H1 loss, suffers R3bn impairment

Nampak swung to a half year loss of R2.4 billion as revenue plunged and it impaired its Angola and Nigeria assets by R3 billion, which is four times its market value. The also warned that future profits were in South Africa were at risk from the ban on alcohol sales due to Covid-19 lock-downs. Nampak CEO, Erik Smuts joins CNBC Africa for more.

How COVID-19 impacts the health & well-being of children

Research shows that children have a lower rate of contracting the Coronavirus and bringing infections to the household. This should provide comfort to South African parents that are in two minds about sending their kids back to school next week, when physical teaching is set to resume. Epidemiologist, Dr Boshoff Steenekamp joins CNBC Africa for more.

Rebosis rolls out COVID-19 testing stations outside malls

Property Group Rebosis, has partnered with government to roll out testing stations for Covid-19 outside its shopping malls in Pretoria – South Africa’s capital. However, foot traffic into these malls is expected to have dived due to the virus lock-downs prevented non-essential stores from trading. Rebosis is yet to release its interim results. Rebosis CEO Sisa Ngebulana joins CNBC Africa for more.

Partner Content

VIVO CEO is a dynamic leader for this innovative global brand

May 2020 -- Six months ago the vision for vivo in South Africa was just beginning to...

Building Africa’s Biggest Digital Classroom

An enduring lesson learnt throughout our 175-year existence is that, while things rapidly change around us, the things that truly matter don’t!...

Trending Now

COVID-19: Economic meltdown the price – skills and trade the answer

Manufacturing is very prone to COVID-19, with many small businesses closing without credit to sustain them. Many had problems as far back as 2015 as they faced changing in markets and also disruptions from electricity and less investment confidence in the South African economy.

How Robots Can Help People With Disabilities Walk Again

The wheelchair has long been the primary solution for those with mobility challenges, yet the design has not changed drastically in hundreds of years. But new walking robots may finally be ready to disrupt the space, with one exoskeleton becoming the

What Happens To Frequent Flyer Miles If An Airline Goes Bankrupt?

With U.S. passenger traffic down by 90%, airlines are desperate to fill seats and are offering big incentives to keep their most reliable customers loyal. But what happens to frequent flyer miles when almost no one is flying and can an airline loyalt

How The Medical Device Supply Chain Failed During Covid-19

More than three months into the coronavirus pandemic, health-care workers on the front-lines of the battle against Covid-19 say they still face shortages of personal protective equipment. The personal protective shortage was one of the early flashpoi
- Advertisement -