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Oil market needs OPEC's custody

The meeting of OPEC and non-OPEC energy ministers was positive and productive.The joint online-session was extremely short. Minister of Energy of the Russian Federation Alexander Novak explained that all decisions were worked out in advance in personal chats and phone conversations.

The OPEC+ countries have agreed to extend the reduction of oil production by 9,7 million barrels per day for one more month - July. At the same time all parties will have to fulfill their obligations at 100%.

According to Bloomberg’s report, Saudi Arabia’s Minister of Energy, Prince Abdulaziz bin Salman said at the beginning of the meeting, although the market situation remaines difficult, there are encouraging signs that "the worst is over".

Novak was also positive: "The overall assessment is that the worst period was in April. The market gradually has begun to recover, thanks to the OPEC+ deal and to the fact that demand also has increased due to the cancellation of quarantine measures. The automotive and airline industries have started to recover. We see positive sentiments and positive growth."

According to statistics, world air traffic, which accounts for 10% of oil products consumption, has already recovered by 64% from pre-crisis levels. Before the coronavirus pandemic, 176 thousand flights were operated in the world daily. In April, at the peak of the pandemic, the number of daily flights fell by 2,7 times - to 65 thousand. By the end of May, that figure has risen up to 93,000. And at present the number of daily flights has already reached 112 thousands. Although a month ago, most of industry analysts predicted that the recovery of air traffic and the growth of consumption of jet fuel would not happen until 2022-2023. 

Nevertheless, OPEC+ participants have to admit that this positive trend is still rather weak and requires support in the form of reduction the oil production.

"Although the market is recovering, it is still quite fragile. There are still many uncertainties in it. That's why we've decided to extend for another month those parameters that were adopted earlier for May-June to reduce production by 9,7 million barrels per day," Novak said on Russia24 TV-channel.

"This is done to increase the impact of the deal, so the market would balance out, and the risks and uncertainties that still affect it would be reduced," explained the minister. At the same time, he highlighted that participants of the meeting considered various options for adjusting the agreement, including the extension of the level of reduction of 9,7 million barrels per day for a longer period.

Prior to the Ministerial Committee meeting, delegates noted that the level of the deal implementation remains an important issue. In particular, countries such as Iraq, Mexico and Nigeria are producing more than the established quotas.
Iraq and Nigeria have already confirmed their commitment to the deal. Meanwhile, Mexico's Secretary of Energy Rocio Nahle said the country will not extend the current level of reduction until July. "Other countries agreed to extend the production cutback in July, but we would not do that. We will stick to the agreement that we signed in April," Reuters quoted her saying.

Novak assured that, according to preliminary data, the deal is generally successful. "The execution level of the deal is quite high and close to 90%. Thus, Russia has executed the obligations approximately by 96 %. This is a very high indicator for us, almost 2 million barrels of production was reduced. We are responsible for the decisions that were made," he said.

According to the head of the Russian department, the agreement allowed to achieve a fair level of oil prices. “Today's price level of $ 40-42 per barrel suggests that the market is positive about what is happening. Futures trading is carried out at prices that reflect the situation on the market,” the minister emphasized.

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