May 1 has come. Market participants have been waiting for this day, because on this very day the OPEC+ countries agreement to reduce oil production comes into operation.
The purpose of the agreement is to balance prices in the energy market. The countries that are the cartel members have agreed to reduce production by 9.7 million barrels per day (from the level of October 2018). An exception was made for the Russian Federation and Saudi Arabia, which will reduce production with the focus on the upper limit of 11 million barrels per day.
From May to the end of June, the cumulative decline in production from the established levels will amount to 9.7 million bpd; thus a 23% lower volume of black gold will enter the market. From July to the end of this year, countries have agreed to reduce production by 18%; the reduction will amount to 7.7 million bpd in absolute figures. The agreement is valid until May 2022; in the remaining period the production will be reduced by 14%, i.e. 5.7 million bps.
OPEC+ countries have agreed to reduce production on April 9. The non-alliance producers will help stabilize the oil market, too. The final decision was approved on April 12; the behavior of Mexico was the subject of discussion for several days in a row. As a result, they agreed that the Latin American country will reduce production by 100 thousand b/d instead of the previously planned 400 thousand b/d.
When countries agreed, the demand for black gold fell due to the spread of coronavirus by 15-20 million barrels per day. At the moment, reduced demand is estimated at 25-30 million b/d. Reductions in production according to the previously agreed scheme will not make up for the actual drop in demand. Analysts believe that countries will revise the agreement and will be able to further reduce production.
The material was prepared with the participation of Katya Wilson,
a leading analyst of the brokerage company UFT Group