How will global markets react to reduced oil production?

How will global markets react to reduced oil production?

14 April 2020, 12:46 625
According to experts, it will take some time before prices stabilize

The Organization of the Petroleum Exporting Countries (OPEC) and other oil-producing countries have made a final decision to reduce production. The reduction will be the largest production cut in history, Marja reports. According to OPEC Secretary General Mohammed Barkindo, OPEC + countries will reduce their overall crude oil production by 9.7 mb/d (millions of barrels per day), starting on 1 May 2020, for an initial period of two months that concludes on 30 June 2020. For the subsequent period of 6 months, from 1 July 2020 to 31 December 2020, the total adjustment agreed will be 7.7 mb/d. It will be followed by a 5.8 mb/d adjustment for a period of 16 months, from 1 January 2021 to 30 April 2022. 
Under the agreement, Saudi Arabia will reduce crude oil production by 3.5 million barrels per day (bpd) from 12 million to 8.5 million bpd. Russia will reduce crude oil production by 1.8 million bpd from 10.3 million to 8.5 million bpd. Mexico was pressed to make cuts of 400,000 bpd but the country announced it would cut output by only 100,000 bpd due to struggling state oil firm Petroleos Mexicanos (Pemex). The United States has stepped in to provide the remaining 300,000 bpd cut. US President Donald Trump announced on Twitter that the major oil deal with OPEC + was completed, congratulating Russia and Saudi Arabia.
Azerbaijan's Ministry of Energy has highly appreciated the recent decision by the ministers of the OPEC+ countries which will help to reduce oil production. "During the 10th Extraordinary OPEC and non-OPEC Ministerial Meeting, a historic agreement was reached for oil producers, consumers, and the global economy as a whole. These steps in the OPEC + format support the oil market in several directions,” the ministry said. 
After the OPEC + agreement, crude oil began the new week with a rise in prices.
At last, the expected agreement was approved, but will the prices stabilize in the next stage? What do the forecasts promise?

According to energy expert Zafar Valiyev, we cannot expect stability in global oil markets in the short term. "Restoring the center of gravity in the market and creating a balance is a long-term process. Currently, the oil supply on the market exceeds demand. There are certain problems in the export of oil and loading refineries with raw materials. The pandemic is negatively impacting the energy sector. In this case, the agreement will help eliminate excess oil supply on the market. Also, it will restore the functional activity of warehouse centers. The agreement will also allow the functional operation of existing free volumes between commercial and strategic oil reserves,” he said.

The expert noted that tensions in the oil market will continue in May-June. "Serious price jumps are not expected. Prices are expected to fluctuate between $ 32 and $ 34 during these months. However, if the quotas are tightly controlled and the OPEC + countries meet their obligations, the oil market may recover by the end of the year. According to the agreement, the cuts will take place in three stages. The main goal is to part by part remove the excess oil available on the market. This, in turn, will normalize the activities of oil-producing countries and companies,” he added.
Economist Parviz Heydarov said the mentioned agreement will prevent sharp price declines. "But it will take some time before prices stabilize. Given the current state of the world economy, I can say that the latest OPEC + decision is very important at the moment. But I do not expect this agreement to pave the way for higher prices. Because for prices to rise, the dynamics of the world economy must be restored. Were it not for this agreement, it would not be possible to prevent the decline in world oil prices. If an agreement to reduce production within the OPEC + format was not signed, the recovery of the global economy after the threat of a pandemic could have been delayed for a long time. Overall, this agreement has played a major role in preventing excessive price declines. But it is too soon to talk about price stability and price increases,” he said.
Shabnam Mehdizade