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Business News/ Industry / Energy/  Oil prices rise as Opec+ combine reaches a production cut deal
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Oil prices rise as Opec+ combine reaches a production cut deal

The global crude oil prices rallied on Thursday after crashing to the lowest level since 2002
  • Any production cut assumes significance because the daily global demand of around 101 mbpd is expected to come down by around 10 mbpd for the March-April period
  • The ninth extraordinary Opec and non-Opec ministerial meeting was conducted via webinar in the backdrop of the coronavirus pandemicPremium
    The ninth extraordinary Opec and non-Opec ministerial meeting was conducted via webinar in the backdrop of the coronavirus pandemic

    New Delhi: The Organization of the Petroleum Exporting Countries plus (Opec+) combine, which includes Russia, agreed on late Thursday night (Vienna time) for a production cut of 10 million barres per day (mbpd), ending its high-stakes game of flooding the global markets with high crude oil production amid the covid-19 pandemic and slowing global growth.

    Buoyed by the media reports of the largest such supply deal that brought an end to brinkmanship by these large oil producers, the global crude oil prices rallied on Thursday after crashing to the lowest level since 2002.

    After rallying by around 11%, the international benchmark Brent settled around $32.02 per barrel on Thursday, on account of the deal reached due to continued US pressure to reach a compromise. The West Texas Intermediate also rose and was trading at $23.56 per barrel. Oil prices had touched an all-time high of $147 per barrel in July 2008.

    Any production cut assumes significance because the daily global demand of around 101 mbpd is expected to come down by around 10 mbpd for the March-April period.

    The contours of the deal were not officially shared by Opec or its partners at the time of filing this story.

    “The impact on the oil market is also unprecedented. Large-scale oil demand destruction, and the resulting massive supply and demand imbalance, have the potential to fill global storage capacity quickly and force production shutdowns. The adverse impact on oil exporting country revenues is huge, at a time when these countries are facing the human tragedy of the pandemic and the resulting economic downturn," said Mohamed Arkab, Algeria’s energy minister and president of the 2020 Opec conference.

    The 9th extraordinary Opec and non-Opec ministerial meeting was conducted via webinar in the backdrop of the coronavirus pandemic.

    The global oil markets have been in turmoil on account of Russia and Saudi Arabia ending their earlier arrangement and increasing production to capture consumer markets. A case in point being the world’s largest oil producer Saudi Arabian Oil Co’s. (Saudi Aramco’s) plan to boost supplies to 12.3 million barrels per day in April and deep discounts.

    In its previous meeting in March, the OPEC+ disagreed on a cut in oil production despite the cartel's technical committee calling for the same.

    US President Donald Trump had earlier tweeted on the likelihood of a production cut of 10-15 million barrels per day (mbpd) by Saudi Arabia and Russia. The low energy price regime could put a majority of US shale oil producers out of business in the run-up to the US presidential elections in November.

    The African Petroleum Producers’ Organization (APPO) in a statement said, “Declare our support to the various processes being undertaken by various parties at various levels aimed at addressing tackling COVID 19 and the volatility in the global oil market."

    Analysts are expecting a perfect storm in the energy markets with the Paris-based International Energy Agency (IEA) and the Opec cutting global oil demand growth outlook.

    “Further, we reiterate our support to OPEC and non OPEC Member Countries as well other global oil producers in their concerted efforts at ensuring long term stability of the global oil market," the APPO statement added.

    The fall in oil prices has placed major consumers such as India at an advantage; which is a key Asian refining hub, with an installed capacity of more than 249.36 million tonnes per annum (mtpa) through 23 refineries. Every dollar per barrel drop in crude prices reduces India’s oil import bill by Rs10,700 crore on an annualized basis. Retail prices of petrol and diesel in India track global prices, not crude, but are broadly linked to oil price trends.

    The cost of the Indian basket of crude, which represents the average of Oman, Dubai, and Brent crude, averaged $56.43 and $69.88 per barrel in FY18 and FY19, respectively, according to data from the Petroleum Planning and Analysis Cell. The price was $65.520 in December, $64.31 in January and $54.63 in February. The price dipped to $33.36 in March and was $23.22 a barrel on 8 April.

    Indian refiners have cut production as the lockdown has led to a sharp decline in demand for transportation fuels. Demand for domestic cooking gas has, however, increased as more people stay indoors during the lockdown aimed at containing the spread of the virus. India is the world’s third-largest oil importer and the fourth-largest buyer of liquefied natural gas.

    Low energy prices have also opened a slew of opportunities such as further cooperation between India and China, the world’s third and second-largest oil importers respectively, and filling up India’s strategic petroleum crude oil reserves at favourable terms. India has also leveraged the opportunity to increase excise duties on petrol and diesel to boost its revenues.

    “We are in the midst of a human tragedy on a scale perhaps not seen since more than a century," Arkab said.

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    ABOUT THE AUTHOR
    Utpal Bhaskar
    "Utpal Bhaskar leads Mint's policy and economy coverage. He is part of Mint’s launch team, which he joined as a staff writer in 2006. Widely cited by authors and think-tanks, he has reported extensively on the intersection of India’s policy, polity and corporate space.
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    Published: 10 Apr 2020, 02:36 AM IST
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