The OPEC+ group has agreed to extend its production cuts through July, apparently satisfied so far with a rise in the market that at the close of trading Friday had brought the U.S. West Texas Intermediate crude benchmark to just below $40 a barrel.
By extending the cuts, the group is promising to keep an additional 1.9 million barrels per day (b/d) off the market that were scheduled to come back on next month.
Putting aside the craziness of April 20, when WTI prices went negative — a never-before-seen phenomenon driven by the contract’s expiration and the fear that there would be nowhere to store crude if you got stuck with it — WTI has risen almost $28 from its $11.57-per-barrel settlement on April 21. It settled Friday at $39.55 per barrel. That’s an increase of more than 240%.
The commodity price of ultra low sulfur diesel during that span rose to $1.1506 a gallon last Friday from 72.69 cents on April 21. That’s an increase of just 58.2%.
OPEC+ consists of the members of OPEC, effectively led by Saudi Arabia, and the “plus” contingent of non-OPEC members, led by Russia. Their initial failure to cut production as demand collapsed due to the pandemic was quickly followed by an agreement to reduce output by 9.7 million b/d through June.
The agreement reached Saturday is for a cut of 9.6 million b/d through July. The cut had been scheduled to decline to 7.7 million b/d next month. It wasn’t extended to the full 9.7 million b/d because Mexico had agreed to cut 100,000 b/d in June but balked at extending those reductions further.
The agreement also calls for several countries that have been violating their quota, most notably Iraq and Nigeria, to reduce their output in August and September to compensate for their excesses in April, May and June. After July, the group will continue to monitor output but will not meet in full until Dec. 1 in Vienna.
A snapshot of the market balance has traditionally been to look at OPEC production and compare it to the OPEC “call,” a figure derived by taking estimated global demand for petroleum, including natural gas liquids and biofuels, subtracting non-OPEC output and then subtracting natural gas liquids produced by OPEC. What’s left is the amount of crude that OPEC theoretically needs to produce to balance the market.
That number is somewhat less relevant now because the effort to rebalance the market is being undertaken not just by OPEC but by the “plus” group that includes Russia, Norway, Kazakhstan and a host of others.
The rapidly changing market that OPEC+ is dealing with can still be seen in the most recent International Energy Agency figures on the OPEC “call.” The call in recent years has tended to fluctuate in the range of 28 million to 29 million b/d. In the second quarter, it is estimated to be a bit over 13 million b/d on the back of the stunning, pandemic-driven collapse in demand. And yet, In the third quarter, assuming a rebound in demand and a drop in output from non-OPEC nations including the U.S., it will be 29.2 million b/d, exactly where it was in the third quarter of last year.
But in an interview this past week with Russia’s Interfax news agency, Alexander Novak, that country’s oil minster, said the cuts in output could mean that the oil market faces a shortfall of 3-million to 5-million b/d in July.
“It’s a victory for Saudi Arabia and Russia, who put a destructive price war behind them to cajole Iraq, Nigeria and other laggards to fulfill their promises to cut production,” Bloomberg wrote in its summary of the meeting. “The two leaders of OPEC+ showed that they intend to keep a close watch on the oil market.”
The two countries working together at the head of the OPEC+ meeting is a sharp reversal from the short-lived price war that developed between the pair when they could not agree on cuts beyond the first quarter of this year. The price war didn’t last long as both countries saw their oil revenues plunge. To paraphrase a famous quote, prices at less than $20 a barrel is much like a noose: It concentrates the mind wonderfully. The OPEC+ deal was the outcome of that keen focus..
One major non-OPEC producing country that is not in the “plus” group: the United States. But it is clearly contributing to a market rebalancing. According to data from the Energy Information Administration, U.S. output of crude in the week ending May 29 was down to 11.2 million b/d, a drop of almost 2 million b/d from the early March peak of 13.1 million. However, the recent increase in prices has led to some companies announcing the resumption of shuttered output.
Diesel prices have lagged the rise in the price of crude for a variety of reasons. The most significant, as FreightWaves has reported, is that refiners have greatly reduced their output of jet fuel, a distillate like diesel, because of the collapse in air travel. Even before that, refiners favored diesel output over gasoline because of the enormous drop in gasoline demand, a reversal that is starting to ease as economies are opening up. The end result is that diesel inventories in the U.S., measured in days’ supply, are at a record level. Other reports on diesel inventories from around the world paint a similar picture.
That weakness in diesel has meant that the weekly average retail price of diesel, tracked by the Department of Energy’s Energy Information Administration, has been declining almost steadily in the last weeks even as crude prices have reversed. On April 20, the day WTI went negative, the weekly DOE/EIA price was $2.48 per gallon. Last Monday, it was down almost 10 cents since then, to $2.386.