Emirates relies on oil prices returning to normal

According to the United Arab Emirates (UAE), oil prices will return to normal as it is understood that the major members of the Organization of Petroleum Exporting Countries plus Russia (OPEC+) have a duty to respect the production quotas currently in place.

The production limits adopted by major oil suppliers will soon bring prices back to "normal", according to UAE Energy Minister Suhail al-Mazrouei. The current situation generated by the health crisis of the COVID-19 disease has left a global economy hit by the measures that required citizen confinement and social distancing, which forced an economic slowdown in most sectors and a fall in consumption due to the general stoppage of activity. This also affected the oil sector as there was an exceptional reduction in demand in the face of situations such as the drastic reduction in travel by means of transport, for instance, cars or planes; the drop in fuel consumption was dramatic. As markets fell under the impact of the coronavirus pandemic, demand plummeted in March and early April and the price of oil fell to record lows. The idea that oil could go back up to $40 a barrel was "a dream", as Al-Mazrouei said during a telephone statement on the occasion of the Atlantic Council. This was before the OPEC+ alliance agreed on unprecedented cuts in production, which in theory meant higher prices because there was less product on the market.

Prices could return to "normal" within a year or two, the UAE minister estimated. "We have seen very good signs of demand picking up, we have seen numbers of driving vehicles are picking up,” he said, citing demand growth in China, India and Europe; just at a time when different governments' measures regarding the seclusion of the population and social distancing are already relaxing, which is undoubtedly helping economic activity to regain its momentum. In this scenario, the path that oil prices will take will depend on whether or not there is a new outbreak of COVID-19, since one could speak of a new episode of economic stagnation if there is an upsurge in cases of contagion and a return to exceptional measures to control the citizens' movement at the national and international level.  

As to whether there will be a second wave of the spread of the coronavirus, the Emirates' Energy Minister said he hoped it would not happen: "I hope we're not going to limit travel and we will go back to at least a consumption level that is reasonable. Now we are back to the consumption level of 2013, believe it or not". Suhail al-Mazrouei did not specify what he meant by "normal" prices. However, the benchmark Brent crude averaged about $64 per barrel last year; a goal now distant. OPEC+ producers negotiated cuts in April to counteract the impact of the pandemic and this month extended the reductions until July. The UAE is fully committed to the OPEC+ agreement and offered to make further cuts during June along with Saudi Arabia and Kuwait to accelerate the recovery of the world oil market, as the minister explained, in the words of the official Emirati news agency WAM.

Led by Saudi Arabia and Russia, the group aims to support a rally that’s seen Brent more than double to around $40 a barrel since late April, paring its loss this year to 40%. For that success to continue, all OPEC+ members must adhere to their production quotas, while other suppliers must refrain from resuming output too quickly, Mazrouei said. Thus, the limitation of production favours that there is less 'stock' in the market and that prices increase, in theory, in the face of less available product. 

"In previous deals we had countries cheat because there was no rule. Now there is a rule, so countries are coming and stating their commitments,” Mazrouei said. The OPEC+ agreement has effectively created a “permanent” group of nations -- one bigger than the Organization of Petroleum Exporting Countries -- that will coordinate to manage crude markets, he said.

OPEC+ has respected by more than 90% the record cut of 9.7 million barrels proposed. The countries of the oil alliance participating in the historic agreement to reduce oil production by 9.7 million barrels per day (mbd) since May 1 were almost entirely in line with that pact in its first month. 

This is what can be seen in the latest OPEC monthly report published on Wednesday, according to which the company from 23 countries (13 OPEC and 10 non-OPEC) reduced their combined production by 8.84 mbd. 

"The high compliance with voluntary production adjustments by the 10 non-OPEC countries led to a drop in oil production of more than 2.59 mbd in May, while OPEC cut 6.25 mbd," the official text said.  

Initially, the market had shown its scepticism about the fulfilment of the agreement, something that tried to stop the strong fall in prices during the coronavirus crisis. 

At the same time, the output of other competitors outside the agreement (mainly USA and Canada) was also reduced by 2 mbd in April and another 0,8 mbd in May. 

OPEC+, which controls about 60% of world oil production, agreed in April to implement a 9.7 mbd cut in May and June, about 10% of world pumping. 

On June 6, OPEC+ decided to extend this record cut until July 31 and to review compliance with the agreement and the market situation on a monthly basis.