OPEC+ relaxes crude oil production cuts as global demand is recovering

16 Jul 2020

The OPEC and some of its allies - the so-called OPEC+ - have agreed to ease crude oil production cuts as the global economy is slowly recovering from the coronavirus pandemic. Production cuts will be eased to 7.7 mb/d from 1 August 2020 until the end of 2020.

In April 2020, the OPEC+ agreed to cut their overall crude oil production by 9.7 mb/d over the 1 May 2020 - 30 June 2020 period, in an attempt to reduce the global oversupply and to firm up depressed oil prices. The production cuts would be calculated on the basis of the October 2018 production level, except for Saudi Arabia and Russia that have a baseline level of 11 mb/d. Production cuts will then be relaxed to 7.7 mb/d from 1 July 2020 (delayed to 1 August 2020 in June 2020) to 31 December 2020 and to 5.8 mb/d from 1 January 2021 to 30 April 2022. The potential extension of the agreement beyond April 2022 will be reviewed in December 2021. According to the terms of the June 2020 agreement, countries which exceeded production quotas in May and June 2020, such as Iraq and Nigeria, must implement extra reductions over the July-September 2020 period; consequently, total cuts could exceed 7.7 mb/d over the August-December 2020 period and amount to 8.1-8.3 mb/d.

According to the latest forecast of the OPEC, the global oil demand should decline by 8.95 mb/d to 90.72 mb/d in 2020, due to the coronavirus pandemic that cut demand by 10% in the OECD (-4.92 mb/d to 42.96 mb/d), before recovering strongly in 2021; oil demand is expected to rise by 7 mb/d (+3.51 mb/d in OECD), reaching 97.72 mb/d globally in 2021, i.e. below its 2019 level. In China, consumption should decline by 0.95 mb/d to 12.12 mb/d in 2020 but it should recover in 2021 (+1.1 mb/d to 13.22 mb/d). OPEC expects to cover a significant share of the rising oil demand in 2021, supplying 29.8 mb/d in 2021 (+6 mb/d compared to 2019), while non-OPEC oil production should only grow by 0.9 mb/d to 62.7 mb/d. The US oil production is expected to slow down in 2021 (slight increase in tight crude production, offset by declines in onshore conventional production), while crude oil production should recover in Canada and increase in Norway, Brazil and Australia. Investments in exploration and production (E&P) in non-OPEC countries are expected to reach US$323bn in 2021, including US$63bn in the US shale oil sector (down by US$100bn from the peak levels of 2014).

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