Agreement Reached After Days of Negotiations
OPEC+ finally agreed to boost output by 500,000 barrels per day from January, which will bring the total output cuts to 7.2 million barrels per day (BPD) when we move into 2021.
Many expected OPEC+ to increase the current production cut of 7.7 million BPD until at least March. However, the organization postponed the negotiations on Tuesday as it failed to come to an agreement.
“500,000 [BPD] from January is not the nightmare scenario that the market feared, but it is not what was really expected weeks ago,” said Paola Rodriguez Masiu, a senior oil markets analyst at Rystad Energy.
“Markets are now reacting positively and prices are recording a small increase as 500,000 of extra supply is not deadly for balances,” she added.
Both Brent and WTI futures ticked higher in the previous session on encouraging coronavirus vaccine developments; however, oil prices are still over 25% in the red since the start of the year.
Back in April, after the coronavirus outbreak, OPEC+ imposed a record-high single production cut of 9.7 million barrels, starting from May 1, which was later reduced to 7.7 million.
Saudi Arabia was one of the main proponents of the idea to maintain the cut levels until the end of the first quarter, but some disagreed because of the consistent uptrend in oil prices in November.
According to analysts, several non-OPEC allies, including Russia and Kazakhstan, have urged other members to gradually raise production cuts, while on the other hand, the United Arab Emirates (UAE) was seeking the answer in the compliance from overproducing countries.
Rumors about disagreements between Saudi Arabia and the UAE earlier this week were surprising to some due to UAE’s reputation within OPEC.
“Surprisingly this time, it was not a discord between Russia and Saudi Arabia that prevented the group from reaching a clear agreement on whether to delay the planned production increase,” said Ole Hansen, chief commodity strategist at Saxo Bank.
Hansen added if the organization doesn’t reach an agreement in the final stage of talks, oil prices could plummet “by several dollars,” but Saxo Bank believes that “cracks will be repaired.”
Crude oil prices trade at $45.94, or 0.7% higher on the day at 8:35 a.m. EST. Similarly, Brent futures are up 0.99% at $49.16.
Oil Prices Also Boosted by New Stimulus Bill Hopes
Lawmakers in the US Congress voiced their support for the $908 billion coronavirus stimulus plan while Senate and House of Representatives officials huddled. It remained unclear whether Senate Majority Leader Mitch McConnell would agree to spend more than $500 billion, knowing that he strongly argued against spending anything near $1 trillion.
McConnel faced a backlash from his fellow conservative lawmakers as well, who were against spending anything more than already-passed $3 trillion prior to the presidential election. A new stimulus bill will provide a big boost to the embattled economy and facilitate a higher demand for energy products.
However, it appears that the worsening situation regarding the coronavirus pandemic in the United States, which took more than 270,000 lives in the country, is making some lawmakers reconsider their stance after months of arguing against an extensive stimulus bill.
Senator Bill Cassidy said Republicans “recognize that things are getting worse. And that if the economy goes into a recession, it really gets worse.”
Cassidy is known for his support for the aid bill, including the extension of unemployment benefits, assisting small businesses through loans and grants as well as additional support for state and local governments.
If Congress fails to come to an agreement on this matter, over 13 million people will lose their federal unemployment benefits on December 26. The business-oriented lobbying organization, US Chamber of Commerce, also expressed its support for the $908 billion bill.
“I like the effort. It strikes the right balance of compromise and it’s a number that’s doable,” said Republican Senator Kevin Cramer.
Yesterday, President Trump said that he intends to sign a coronavirus relief package if Congress can reach an agreement.
"I want it to happen, and I believe they're getting very close to a deal," Trump said.
OPEC+ agreed to increase output by 500,000 barrels per day starting January, which is set to take total production cuts to 7.2 million BPD at the start of 2021. Elsewhere, the US Congress appears closer to strike a deal on the new stimulus bill.