WEEKLY ENERGY RECAP: It is too early to prejudge the largest oil output cut in history

WEEKLY ENERGY RECAP: It is too early to prejudge the largest oil output cut in history
The logo of the Organization of the Petroleoum Exporting Countries (OPEC) is seen outside of OPEC's headquarters in Vienna, Austria April 9, 2020. (REUTERS)
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Updated 12 April 2020

WEEKLY ENERGY RECAP: It is too early to prejudge the largest oil output cut in history

WEEKLY ENERGY RECAP: It is too early to prejudge the largest oil output cut in history
  • This sustainable output cut strategy will last until April 2022, starting with a reduction of 10 million bpd during May and June

OPEC+ has made the largest oil output cut in history.
The move points to the alliance seeking to balance the oil market over the medium-term rather than working on a short-lived recovery.
The aim of Saudi Arabia remains to ensure energy security through sustainable pricing and sufficient supplies at a level that stimulates upstream projects.
However, facing such unprecedented headwinds, it is still too early to know if the agreed 10 million barrel per day (bpd) output cut from OPEC+ producers will be sufficient enough to balance the demand deficit — in the short term at least.
That is because there are questions over whether the largest oil output cut in history will offset the estimated 20 to 30 million barrels in oil demand that could be lost as a result of the spread of the coronavirus disease, COVID-19, and the associated impact on global transportation.
Over the medium term, we will likely see a more tangible impact as the cuts gradually absorb the glut as lockdowns are lifted around the world, and as inventories deplete.
This sustainable output cut strategy will last until April 2022, starting with a reduction of 10 million bpd during May and June, then falling to 8 million bpd for the second half of 2020, dropping to 6 million bpd for the remaining 16 months.
It represents a commitment to a full two years of output cuts that will be closely monitored by OPEC’s Joint Ministerial Monitoring Committee (JMMC) and assisted by the Joint Technical Committee (JTC) and the OPEC Secretariat.
Hence, the market should not be underwhelmed by the agreed 10 million bpd production cut — even if there was an earlier expectation of a much larger reduction. What is important is that rivalries have been set aside and a common commitment established to protect the global economy from future turmoil.