On June 6, 2020, the Organization of Petroleum Exporting Counties (“OPEC”) and leading oil producing ally countries referred to collectively as “OPEC+”, unanimously agreed to extend production cuts of approximately 10 million barrels per day through the end of July.

For many market participants, this is welcomed news, given the significant uncertainty facing oil markets amidst the backdrop of a sustained period of global oil oversupply, COVID-19 related demand reduction and uncertainty in the global economy. The production cut extension also gives markets further confidence that Saudi Arabia and Russia are committed to stabilizing oil markets and enforcing compliance within OPEC+. Now, the world awaits how United States shale producers will react. Will they ramp-up production or follow suit?

How We Got Here

On April 12, OPEC+ agreed to a record oil production cut of 9.7 million barrels per day to help stabilize oil markets. OPEC+’s deal in April jolted the oil markets, setting the following production cuts: 

  • 9.7 million barrels per day production cut in May and June 2020 (2 months);
  • 7.7 million barrels per day production cut from July to December 2020 (6 months); and
  • 5.8 million barrels per day production cut from January 2020 to April 2022 (16 months).

Oil prices have responded in kind, steadily increasing since the mid-April plunge forced oil futures contracts below zero and saw spot prices reach levels last seen decades ago. However, as the June meeting approached, market participants feared that any premature production increases could jeopardize the substantial progress already made. With the July 1 trigger for production increases looming, Saudi Arabia and Russia agreed last week to extend production cuts for an additional month, delaying any production increases until August.

In anticipation of this extension, a dispute broke out among OPEC+ members regarding compliance with the April deal, a longstanding source of frustration for many countries. Saudi Arabia and Russia argued that countries that have not fully complied with the April deal should immediately implement the agreed-upon production cuts, with deeper production cuts to follow to make up for early non-compliance. Mexico declared that it was unwilling to participate in cuts from July, instead encouraging members in non-compliance to take action. As June 6 approached, market participants eagerly watched to see whether OPEC+ would remain unified, especially in light of the recent détente between Russia and Saudi Arabia.

Decision on June 6, 2020

Recognizing the fragility of the oil markets and the need to provide stability, OPEC+ ultimately reached a deal on June 6, which modifies the schedule of production cuts set in April as follows:

  • 9.7 million barrels per day production cut in June 2020 (1 month);
  • 9.6 million barrels per day production cut in July 2020 (1 month);
  • 7.7 million barrels per day production cut from August to December 2020 (5 months); and
  • 5.8 million barrels per day production cut from January 2020 to April 2022 (16 months).

In addition to the continuation of the current production cuts through July, the deal also demonstrates OPEC+’s increased focus on member country compliance with the agreed reductions. OPEC+’s Joint Ministerial Monitoring Committee will meet monthly to review compliance with agreed production quotas. Countries that overproduce their quota in May and June will be required to compensate with corresponding reductions from July to September 2020.

OPEC+’s Joint Technical Committee that monitors oil market conditions will meet next on June 17 to closely monitor developments in the market. The next scheduled OPEC+ meeting is scheduled for November 30; however, OPEC+ is prepared to meet sooner if circumstances warrant. Members will review the agreement for potential extension in December 2021.

What Is Next

Key considerations in the coming weeks and months that may determine the success of the deal include:

  • How OPEC+ manages the relationship between short term prices and the futures curve;
  • How short term oil demand responds as COVID-19 related movement restrictions begin to ease;
  • Whether global crude oil inventories start to diminish;
  • Whether OPEC+ members comply with agreed production cuts;
  • Whether Russia and Saudi Arabia remain aligned;
  • Whether countries pursuing their own national interests like Mexico destabilize OPEC+’s unified approach; and
  • How independent producers in the United States respond to the recent increase in oil prices, particularly amidst the Texas Railroad Commission’s recent decision on May 5, 2020 not to curtail Texas oil production.

Baker McKenzie’s North American Energy Response team will continue to monitor developments closely, and is available to engage with you regarding any questions you may have.

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