Crude Oil Prices Drop as OPEC+ Complies With Output Cuts

BySwastik Bhattacharjee

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Is the sun about to set for the Oil Industry?

Oil prices keep on going down after OPEC+ said that the producer group is almost fully complying with the output cuts. This is being done to support the prices as the demand dropped due to coronavirus pandemic.

OPEC+

OPEC+ is the acronym for the organization of the Petroleum Exporting Countries and it’s allies. The organization was founded in Baghdad, Iraq in the year 1960 by signing an agreement. Initially, the pact was among five nations, namely the Islamic Republic of Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela, who were the founding members of the organization. Currently, the organization has a total of 14 member countries. It acts as a permanent, intergovernmental organization to coordinate and unify petroleum policies among its member countries.

This coordination of policies secures and maintains a stable price for petroleum and puts forward an economic, efficient supply to the consuming nations.

The company has its headquarters in Vienna, Austria. The membership in the organization is open to all countries which take part in exporting oil and complies with the ideology and rules of the organization.

The fourteen members of the OPEC control 35 percent of the total global oil supply and 82 percent of the proven reserves. With these ten non-OPEC nations add up to form OPEC+. Most notable among those are Kazakhstan, Russia, and Mexico. This makes them more powerful increasing the share percentage of global oil supply to become 55 percent and also hikes the percentage of proven oil reserves to be 90 percent. The increase in share adds to the authority of the organization and provides its unimaginable influence over the world economy.

Around 97 percent of output cuts in July:

Reuters reported that oil output cuts were seen to be around 97 percent in July. As the COVID-19 pandemic hit the market hard reducing the demand for petroleum products overnight, oil producers were forced to reduce production by record amounts. This was done to reduce worldwide inventories.

In August, OPEC+ with compliance to the oils demand reduced the production of barrels per day to 7.7 million. Previously the production stood at 9.7 barrels per day.

The recent pandemic stirred up the market and has made it more volatile. This has forced the Joint Technical Committee and the Joint Ministerial Monitoring Committee to hold meetings every month of this year. Usually, the meeting takes place ahead of OPEC+ meetings only.

Russia’s Energy Minister Alexander Novak said as reported by the Oilprice.com that although the two committees are meeting this week they won’t be discussing the ongoing production cuts and also will not make any tweaks to the agreements.

In the last month’s meeting, JMMC noted an improved overall compliance rate. Before that in June when the pandemic surged the most and countries went for lockdown halting oil demand the rate was a record-breaking 107%. Additional voluntary from countries like Saudi Arabia, the United Arab Emirates, and Kuwait added a cut of 1 million barrels per day in June over their shares of cut taking the rate over the roof.

In July, the production started to rise by 980,000 barrels per day month over month to an average of 23.17 million barrels per day. Russia, who acts as the leader of the non-OPEC group in OPEC+ has notified that its oil output rate in July was in line with the rate that OPEC+ committed.

End of the oil industry?

Not only the COViD-19 pandemic that put a dent in the market for oil but also the rise of awareness about climate changes are having an impact on the industry. The effect of these has risen so much that the industry is seeing off investments in recent years. BP Plc., the company which doubled the drilling after historic 2015 Climate Change Agreement, has announced one of the largest writedowns by any oil company after cutting 17.5 billion off the value of its assets. The company once was found saying “it is increasingly unlikely that the world’s reserves of oil will ever be exhausted,” is now claiming that they “expect the pandemic to hasten the shift away from fossil fuels.”

Along with this the company also has high-risk projects like deepwater discoveries off Brazil, Angola, and the Gulf of Mexico.

However, ExxonMobil has not made any write-downs although the cuts and drop in demand. The company stands firm on their ideology that oil prices will recover once the pandemic subsides.

Recently, in the Paris Climate Agreement, it was seen that by the next century the temperature rise must not be by more than two degrees to avoid fearsome effects of climate change. Our current rise by the fall of 2100 is estimated to be 3.2 degrees. This gives us ten years to lower the carbon emissions to save us from facing the consequences. Although last year’s UN climate summit saw participants from 200 countries, no goal was set then making the summit a failure.

Companies might have to write off 200 billion USD in the current year due to stranded assets. The figure might cross trillions of dollars in the next few years if the governments around the globe get serious about climate change.

Companies like BP, Royal Dutch Shell, Hess Corp. might be the best investing options, although the aggressive write-offs. Companies like ExxonMobil who still clings to the worthless assets might meet a sudden downfall in the coming years.

Figures show that India saw its fifth consecutive year on year decline in oil consumption in July. It is estimated about 11.7 percent decline in yoy leading the refineries to work below their potential in FY2020-21.

Crude Oil Prices Drop as OPEC+ Complies With Output Cuts

BySwastik Bhattacharjee

OPEC+

Around 97 percent of output cuts in July:

End of the oil industry?

By Swastik Bhattacharjee

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