Oil production cut numbers don’t add up

As the cost of pumping crude exceeds the selling price in most cases, production in many oil-producing countries is already taking a hit

Rashid Husain SyedThe math is fuzzy.

When the agreement to cut crude oil output by 9.7 million barrels per day (bpd) was announced, U.S President Donald Trump, who played a dominant role in getting the agreement, went further.

“Having been involved in the negotiations, to put it mildly, the number that OPEC-plus is looking to cut is 20 million barrels a day, not the 10 million that is generally being reported,” a tweet from the president said.

Saudi Oil Minister Abdulaziz bin Salman also underlined that the overall cuts would go considerably beyond the announced cuts. And Iranian Oil Minister Bijan Zanganeh claimed that the G20 crude oil producers have agreed to reduce their output by 3.7 million bpd.

As the cost of pumping crude is exceeding the selling price in most cases, production in many oil-producing countries is already taking a hit. Combined output decline from the U.S., Canada, Brazil and Norway has touched 3.5 million bpd.

Yet, after going through the fine print of the output cut agreement, analysts appear increasingly unconvinced.

Iraq, a producer with a patchy record, is being called upon for a one-million-bpd supply reduction. That looks dubious.

Saudi Arabia can be relied on to deliver 2.5 million bpd of pledged cuts. But the kingdom negotiated a baseline of 11 million bpd to begin its cuts. That’s about 1.3 million bpd more than it was producing in the first quarter of the year.

Russia’s past record is a cause for concern. According to the accord, Russia is required to cut output by 2.5 million bpd. In past deals with the Organization of Petroleum Exporting Countries (OPEC), Russia has struggled to deliver cuts amounting to barely one-10th that size. Would it comply with the 2.5 million bpd cut?

Also included in the 20-million-bpd cuts are supply reductions that have already taken place – like those in Libya, which has lost almost one million bpd of production, and in the sanctions-hit Iran and Venezuela.

Supply declines in producers outside OPEC-plus, like the U.S., Canada, Brazil and Norway, are said to account for almost four million bpd out of the depicted 20-million-bpd cut.

Reports say that participating countries would make these cuts from record-high current output, and not from the lower volumes they were producing in the first quarter.

Aggravating the scenario is that, in the meantime, all producers are free to pump as much oil as they can until the cuts begin on May 1.

Also, the Texan oil regulator, the Railroad Commission of Texas, hasn’t agreed to any output cuts.

Meanwhile, the International Energy Agency projects that global oil demand will plunge by 29 million bpd in April and by a record 9.3 million bpd in 2020 compared to last year, erasing years of growth.

And the International Monetary Fund estimates the global gross domestic product (GDP) to shrink by three per cent this year, adversely impacting the global crude demand.

Consulting firm Energy Aspects thinks the production cut will be around seven million bpd, not 9.7 million bpd less than countries’ first-quarter production. Goldman Sachs reckons it might be just 4.3 million bpd below first-quarter output, once non-compliance is factored in.

Bank of America now projects the demand to plunge by an average of 9.2 million bpd in 2020, more than double the 4.4 million projected earlier. Bank of America warns it anticipates inventories will surge by 12 million bpd during the second quarter and another 1.5 million in the third quarter. That will push “global storage capacity to the limit. … Plenty of downside risks remain,” its strategists wrote.

Energy research firm Rystad Energy says oil prices would be unlikely to return to pre-COVID-19 levels this year, despite production cuts. Market analysts at BNP Paribas say the deal may “at best” help to set a floor on the market’s sliding oil prices before a recovery.

And markets continue to feel the heat.

Toronto-based Rashid Husain Syed is a respected energy and political analyst. The Middle East is his area of focus. As well as writing for major local and global newspapers, Rashid is also a regular speaker at major international conferences. He has been asked to provide his perspective on global energy issues by both the Department of Energy in Washington and the International Energy Agency in Paris.

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