Production Restraint Agreement

“In the absence of a rollover of current production, downward pressure on oil prices would threaten Brent to move back to around 40 $US a barrel, after recent gains in vaccine news have helped to raise prices. Faced with these challenges, we believe that the group will probably find a compromise to delay the increase in production by three months. The April agreement called for restrictions to be strangled at the end of June. But OPEC officials said Saturday that the group must remain cautious in the face of an uncertain return in global demand for crude oil. Since March 1982, OPEC has applied production or supply quotas on various occasions to control oil prices. No explicit formula was used to distribute the contingents among the members. Nevertheless, an implicit formula can be inferred from the behaviour observed by OPEC. The main elements of the formula thus derived are the oil production capacity of each member and imports (of products) per capita. Efforts to extend this implicit formula to some non-OPEC oil exporters are not realistic in terms of political acceptance. As a result, the prospects for a cooperative production restriction between OPEC and non-OPEC were and remain extremely low. The deal comes less than two weeks after OPEC members agreed on production cuts.

It is expected to help raise oil prices further, which have risen by more than 15% since 29 November. International benchmark Brent crude oil is now trading around $54 a barrel. However, some analysts have said that these price levels, which are half as long as they were two years ago, may not be sustainable. In today`s market, major exporters such as Iran, Russia and Saudi Arabia are engaged in a fight for market share, particularly in Asia, and will not want their rivals to increase their sales at their expense. OPEC held its semi-annual meeting scheduled for virtually November 30, 2020. Although the group was unable to reach an agreement at the meeting, the question of whether the production restriction will be relaxed from 1 January 2021 is under discussion. Currently, OPEC aims to reduce production by .b 7.7 million by the end of the year. This figure is expected to decrease by 5.8 million .b/d in early 2021. To maintain the perception that the cuts are underway, the Saudis say they already told their customers about cuts in January, when production restrictions are due to come into effect.

The recovery in prices was fuelled by a sharp drop in production, particularly by OPEC and its opec partners. The group agreed to reduce production by 9.7 Mb/d, or nearly 10% of the world`s oil supply. Supply also declined sharply in the United States and Canada. The rise in oil prices was also supported by a recovery in consumption, as containment measures were relaxed and began to travel and traffic began to increase. In an immediate challenge to producers` efforts to reduce oil production, Libya resumed production in its largest oil field on Saturday after five months of closure, according to Libyan government officials. The agreements in recent weeks are a U-turn for the Saudis and their allies, such as Kuwait and the United Arab Emirates, which have pursued a two-year policy of increased oil production aimed at lowering prices to oust the most expensive producers in the United States and elsewhere. The experience had mixed results, as U.S. production proved more resilient than some analysts had expected, while the resulting low prices weighed on the finances of countries such as Saudi Arabia and Russia, which depend on oil revenues. Ann-Louise Hittle, Vice President of Wood Mackenzie, said at the event: “With the increase in coronavirus cases in Europe and the United States, for example, the global recovery from the lows in spring 2020 is slower than expected.