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10 Apr, 2020 12:24

Russia-OPEC production cuts may not be enough to save oil market

Russia-OPEC production cuts may not be enough to save oil market

As the world waits for the Organization of the Petroleum Exporting Countries (OPEC) and allied oil majors to finally sign a deal on output cuts to stabilize the market, analysts say the move might fail to achieve its goal.

Russia and Saudi Arabia – whose disagreement led to the collapse of the previous accord – reportedly found common ground on new output cuts on Thursday. The alliance of OPEC members and non-cartel states (known as OPEC+) have not released any document so far, as Mexico is reluctant to support the cuts which are expected to be at least 10 million barrels per day.

“Even 10 [million barrels per day] will be difficult,” John Hall, chairman of Alfa Energy, said in an interview with RT, commenting on the ongoing talks. The analyst said that larger reductions are in doubt, as it is unclear where they would come from, especially without the support of other non-OPEC states such as the US – a vocal opponent of any cuts.

“America has to be a part of this deal. I would find it very difficult to hear that Saudi Arabia and Russia had agreed a deal without America making a true cut in output,” he noted.

The oil agreement is expected to be finalized on Friday, after the G20 nations hold a video conference. The virtual talks may help persuade Mexico to accept the terms of OPEC+, as the nation reportedly wants to contribute four times less than stipulated by the document.

However, Mexico’s contribution would not make much of a difference, Lipow Oil Associates LLC President Andrew Lipow told RT, commenting on Thursday’s developments. Even if the alliance of oil producing majors agrees on daily cuts of 10 million barrels, this would not be enough, he believes.

“With 10 million barrel per day cut it is unclear what the baseline is. We’ve already seen increases in production from Saudi Arabia, the United Arab Emirates, and Kuwait that are totaling nearly four million barrels a day,” Lipow said. He noted that the caps will not come into effect until May, meaning that we will continue to see inventory increases this month.

According to Lipow, OPEC will inevitably be forced to come to an agreement as it has a “limited number of options” amid the market rout and low demand for crude in the wake of the coronavirus outbreak.  

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However, the signatories of the deal will have to accept that the US, Canada, Brazil, and Norway will not make mandatory production cuts, but will be cutting as dictated by the market price, Lipow believes. The analyst says countries like Nigeria, Algeria, and Equatorial Guinea will be reluctant to comply in full, so much of the burden will fall on Russia and Saudi Arabia.  

“The market will be skeptical about their full compliance... There is a chance that oil prices continue to fall due to the skepticism over this agreement,” Lipow concludes.

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