Opec and its oil-producing allies have agreed to extend their historic production cut for an additional month as crude recovers to near $40 a barrel.
The agreement, sealed during the group’s video-conference meeting, is in bid to balance the global oil market, said media reports.
As per the deal, Saudi Arabia and Russia will continue to take the bulk of the nearly 10 million barrels per day of cuts, but the two countries emphasized they wanted to see stronger compliance from other members as they held a virtual meeting on Saturday.
The latest agreement builds on a deal struck in April that brought an end to a price war between both countries that - in tandem with collapsing demand during widespread lockdowns - threatened to overwhelm global oil markets and ravage producer economies.
The deal was largely hammered out before the formal video meetings of oil ministers began, with oil’s recent recovery promoting widespread support for keeping the full cuts in place rather than tapering them from July as originally planned.
The group, known as Opec+, also demanded countries such as Nigeria and Iraq, which exceeded production quotas in May and June, compensate with extra cuts in July to September.
Nigeria’s petroleum ministry said Abuja backed the idea of compensating for its excessive output in May and June.
Opec+ had initially agreed in April that it would cut supply by 9.7 million barrels per day (bpd) during May-June to prop up prices that collapsed due to the coronavirus crisis. Those cuts were due to taper to 7.7 million bpd from July to December.
Both Saudi Arabia and Russia worked together to orchestrate the extension agreed on Saturday, and they also pressured Iraq, the second largest producer in Opec, to state publicly that it would comply with its commitment to cut production by about 1 million barrels a day.
Analysts have estimated that Iraq has been missing that target by hundreds of thousands of barrels a day.
“It was unanimously agreed by Opec and Opec+ countries to extend the current reduction to the end of July,” said Suhail Al Mazrouei, the UAE’s energy minister, after the meeting.
Lauding the Saudi and Russian efforts, Al Mazrouei said: "The UAE is proud of its supportive role to the alliance of oil producing countries who made a courageous decision and a collective effort that deserves praise from all participating producing countries."
US energy secretary Dan Brouillette said on Twitter that he welcomed the deal at "a pivotal time as oil demand continues to recover and economies reopen around the world".
“Demand is returning as big oil-consuming economies emerge from pandemic lockdown,” he said. “But we are not out of the woods yet,” Saudi Arabia’s Energy Minister Prince Abdulaziz bin Salman said.
Benchmark Brent crude LCOc1 climbed to a three-month high on Friday above $42 a barrel, after diving below $20 in April. Prices still remain a third lower than at the end of 2019.
“Prices can be expected to be strong from Monday, keeping their $40 plus levels,” said Bjornar Tonhaugen from Rystad Energy.
One risk is that reviving the world economy after the worst of the pandemic passes will prove more difficult than investors are now anticipating. While production cuts and voluntary closings of oil wells have helped bring demand and supply closer to balance, there are still huge stocks of oil in tank farms and on ships that could flood the market.
“Warning flags are still flying here,” said Robert McNally, president of Rapidan Energy Group, a market research firm.
