The OPEC+ Agreement and Uncertainty in the Oil Market

Al-Rai, Kuwait, April 15

Last week, members of the “OPEC Plus” alliance agreed to reduce oil production rates by 10 million barrels per day, starting from the beginning of May for an initial period of two months. This was done as a part of an action plan to save and restore balance to the global oil market. OPEC Plus also agreed to reduce total production for a subsequent period lasting six months starting in early July to 8 million barrels per day, before applying another reduction of 6 million per day for 16 months starting in January 2021. This agreement is considered a milestone in the history of oil production, allowing oil-producing nations to finally end their price wars and battles over market share. Moreover, the agreement represents an unprecedented reduction in production levels, with Saudi Arabia and Russia reducing their own level to 8.5 million barrels per day. Still, the prevailing belief is that the surplus in the market remains considerably high – in the range of 10 million barrels per day – despite the deal. This means that oil prices will suffer from continuous downward pressures during the second quarter of this year, and the proposed OPEC Plus cuts alone will not suffice in reversing the trend. The main shock to the market came as a result of the coronavirus pandemic, which took a huge toll on global demand for oil. Of particular interest was Saudi Arabia’s role in handling these negotiations. The talks were successful thanks to the immense diplomatic efforts exercised by His Highness Prince Abdulaziz, the minister of energy, who orchestrated the conference, facilitated communications with all international parties and maintained transparency and credibility with external actors and the media. He did so in an extremely short period of time. Now it remains to be seen how the markets will react. One school believes that the market will witness a recovery during the second half of this year and that prices will hover around $35 a barrel. The second school is concerned with the potential lack of commitment to the reduction, claiming that the agreement came too late. According to these experts, prices will continue to plunge, hovering between $20 and $25 a barrel, and start climbing back toward $30 only at the end of 2020. – Mohammed Al-Shatti (translated by Asaf Zilberfarb)

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