Opec and Russia primed to unwind historic supply cuts

Opec and Russia are primed to start unwinding the record oil supply cuts agreed earlier this year, as they aim to raise production without undermining a recovery in crude prices.

The oil cartel and its allies are set to scale back the cuts of 9.7m barrels a day that took effect in May to 7.7m b/d from August, Opec delegates said on Wednesday.

It would be the first test of their ability to start returning to the market the equivalent of almost 10 per cent of global crude output, which was removed this spring after Covid-19 lockdowns and travel bans crushed oil demand.

It confirms the expectation since the latest Opec meeting that oil producers would reduce cuts to 7.7m b/d from August until the end of the year, before tapering further to 5.8m b/d between January 2021 and April 2022. 

The move is being closely watched by oil traders, after the cuts helped crude recover from below $20 a barrel in April to about $40 a barrel on Wednesday. Prices have also been supported by the gradual reopening of the global economy, which has pushed demand higher and the oil market into a deficit.

But adding back production is a delicate act, at a time when new coronavirus cases in the US and elsewhere are soaring.

Donald Trump, US president, has championed April’s historic supply deal as a way to protect America’s shale oil industry, which has been hit hard by the dramatic drop in prices. Brent crude, the international benchmark, traded near $70 a barrel at the start of this year.

Prince Abdulaziz bin Salman, Saudi Arabia’s oil minister, appeared conscious of this risk as he opened the virtual Opec meeting on Wednesday. “The extra supply resulting from the scheduled easing of [the] production cut will be consumed as demand continues on its recovery path,” he said.

In his remarks, the minister added that the increase in production might be smaller than expected as countries that did not meet their supply cuts targets in the first three months of the deal hold back some production as a form of compensation.

He said this could mean the cuts would only shrink to about 8m b/d, if countries such as Iraq and Nigeria did not release as many barrels on to the market.

Prince Abdulaziz also indicated that, while Saudi Arabia’s production would increase in August, it would only be to supply the domestic market, where power demand for air conditioning jumps in the summer months. The kingdom’s exports are expected to remain steady in August.

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Saudi Arabia, which this year launched a price war to punish rival producers by flooding the market with its crude, has since sought to emphasise that the move was an “unwelcome departure” from its oil policy.

Alexander Novak, Russia’s energy minister, said on Wednesday that oil nations were moving into the “second phase” of the supply agreement. “The market is very close to balance,” he added.

Officials have been meeting more frequently to track the oil market during the Covid-19 crisis, with key decisions taking place outside of the traditional twice-yearly gatherings in Vienna.

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