Members of the Organization of Petroleum Exporting Countries will meet on Wednesday, and it is widely believed that they will agree to reduce production cuts. Since coronavirus took hold globally, demand for energy products has dissipated, causing prices to fall. OPEC+ members had agreed to cut production, in order to prop up prices.
Covid-19 created a huge oil glut this spring. Drivers stayed off the road, and many businesses halted production, sapping energy consumption. According to data from the Energy Information Agency, gasoline demand declined by 31% between January and March of this year. Meanwhile, production continued at a reduced rate (turning it off comes with its own set of problems), and producers began to run out of storage space.
Things really went sideways in April. For one day, the price of the benchmark crude West Texas Intermediate fell by 250% to -$40.32. It clawed its way back to around $40 per barrel, but not without its share of ups and downs along the way. Prices are rising again, for now, which creates incentives to re-enter the market, as more companies are able to turn a profit from drilling. However, that sets up for another price decrease, which could send us back in the opposite direction…you see where this is going.
But back to OPEC+. The group seems poised to reduce restrictions from 9.7 million barrels per day to 7.7 million barrels per day, beginning in August. The group’s original plan was to cut production by 9.7 million in May and June, then pull back to 7.7 million barrels per day through the end of 2020. Beginning in January 2021, OPEC+ members agreed to ease restrictions to 5.8 million barrels per day, through April 2022. However, market conditions convinced members to hang on to the tighter restrictions for a bit longer. As of right now, it’s July, and OPEC+ production is still capped by 9.7 million barrels per day.
On Friday, the International Energy Agency reported that the worst effects of the coronavirus on the oil market have let up, but we will still have to deal with the fallout for the rest of the year. The group predicts that oil demand will fall by 5.1 million barrels per day in the second half of 2020. It estimates that demand fell by 10.75 million barrels per day in the first half of the year.