Dubai: OPEC+ has agreed on a one-month extension of record output cuts, intended to further support the oil-price recovery.
With the cartel's video conference now underway, delegates said all nations have agreed to the new deal. The group will maintain its production cut of 9.7 million barrels a day to the end of July, instead of easing it to 7.7 million after this month as planned.
In addition, nations including Iraq and Nigeria have promised to fully implement their production curbs and make extra reductions from July to September to compensate for failing to hit their targets in May and June, the delegates said.
The deal is a victory for Saudi Arabia and Russia, who spent a week cajoling fellow members to fulfill their obligations. It's a particular vindication for the kingdom's Energy Minister Prince Abdulaziz bin Salman, who has consistently pushed fellow members to stop cheating on their quotas since his appointment last year.
Oil has just posted a sixth weekly gain in London, more than doubling to $42.30 a barrel since April as traders anticipate tighter supplies as demand recovers from the coronavirus lockdowns. U.S. President Donald Trump on Friday hailed the cuts from the Organization of Petroleum Exporting Countries and its allies for saving the American energy industry.
The group hopes to build on that success by pushing the market into a supply deficit next month, using a price structure called backwardation to start to chip away at the billion barrels of oil stockpiles that built up during the pandemic.
OPEC+ will meet again in the second half of June for another review of the oil market. Talks are scheduled on June 18 for the Joint Ministerial Monitoring Committee, which oversees the deal. The panel could recommend a further extension if it's deemed necessary, pushing the deep production cuts into August, a delegate said.
Cutting production is always painful for oil-dependent states. Iraq in particular needs every penny because it's still rebuilding its economy following decades of war, sanctions and Islamist insurgency.
Iraq made less than half of its assigned cutbacks last month, so compensating fully would require it to slash production by a further 24% to about 3.28 million barrels a day, according to Bloomberg calculations. Accepting such terms could risk a backlash from Iraqi parliamentarians and rival political parties for bowing to foreign pressure.
The traditional laggards on OPEC+ cuts have promised many times before to do better. Some analysts were skeptical that this occasion will be any different.
"Everyone saves face with this agreement," Jan Stuart, global energy economist at Cornerstone Macro LLC, said on Friday after a tentative deal was in place. "But it begs the question: What is the enforcement mechanism? I'm very curious to see how the organization is going to elicit greater compliance from the cheaters."
There's also a risk that future OPEC+ curbs could be undermined by a return of Libyan oil. The civil war there halted more than 1 million barrels a day of production, helping OPEC+ rebalance the market, but a cease fire now opens the door for a gradual recovery of supply.
For now at least, members of OPEC+ can enjoy the price gains resulting from their deal. The recovery has eased pressure on the budgets of oil-rich nations, while also reviving the fortunes of energy companies from Exxon Mobil Corp. to shale drillers such as Parsley Energy Inc.