The agreement between the Organization of Petroleum Exporting Countries (OPEC) and non-member countries (OPEC+) to bolster the recent fall in oil prices was especially awaited by producers like Angola that rely heavily on their crude exports for income. But the deal, struck last weekend, means Angola should cut oil production to around 1.1 million barrels per day. And the announcement has not sustained oil prices in the international markets.
The cut in production, decided on 9 April, will be 23% for all signatory states and is based on October 2018, at which time Angola had daily production of 1.53 million barrels, which after reviewing the level, will entail a reduction to 1.18 million barrels per day.
The country has produced between 1.3 million and 1.4 million barrels per day in recent months, down from more than 1.6 million registered in 2017 and 2018, according to the OPEC reports.
The cut is due to be applied at the beginning of May, for two months, and is expected to be lifted in the following months, based on decisions made at the Summit between the OPEC countries, Russia, the United States and other non-OPEC members, which aims to reduce world production by 9.7 million barrels per day, to balance the supply and increase prices.
The Participating Countries agreed that, after the immediate downwards adjustment of overall crude oil production until 30 June 2020, the total adjustment agreed will be 8 million barrels per day, from 1 July 2020 to 31 December 2020.
The parties agreed to meet on 10 June 2020 via webinar, to determine “further actions, as needed to balance the market”. Despite the decision, oil prices fell on international markets, and Brent was trading at US$ 29 on Tuesday. Brent already traded above US$ 70 earlier this year.
China has been, by far, the largest importer of Angolan oil, buying nearly two thirds of the total produced, according to figures from Sonangol.
A recent report from the Institute of Natural Resource Governance Institute (NRGI) of the United States, showed that the total of around US$25 billion in loans granted by China to Angola, paid for or backed by oil supplies, most (a line of US$15 billion granted by the Development Bank of China), has repayment terms that include variations in the price per barrel of Brent – increasing when the price rises on international markets and vice versa.
Some of the loans do not have a fixed deadline for settlement, but rather a model for calculating the value of each barrel of oil, and come to an end when the total value of exports to China equals the amount financed by Chinese banks.
In the current situation of low prices (near US$30), this second type of agreement implies that the repayment of the loan will be delayed by a few years.
Other loans from Chinese banks to countries like Angola are settled via a specific quantity of barrels of oil to be exported every day (10,000 barrels, or 300,000 barrels per month, in one case) – thus, sensitivity to the price variation is lower.
Angola’s debt to China represents nearly half of its total amount of debt, and in 2015, after the fall in the price of oil, China restructured and renegotiated financing terms.
On top of this OPEC+ accord, oil producers in the G20 countries will also contribute with their own output reductions. Production from major oil producing countries like the US, Brazil and Canada are expected to decline due to the effects of the current lower oil prices, which could have an additional impact on global oil supply of 5 million barrels per day.
Reacting to the agreement, Eaglestone Securities said that these output reductions “could take months, or even more than a year, to materialize, but they will come automatically depending on the future evolution of oil prices”. “Still, the involvement of the G20 countries, which have sometimes criticized the OPEC, was politically important in the current backdrop for the oil market”.
For Angola, Eaglestone Securities adds, production will drop by almost 350,000 barrels per day (or -22.8%) next month, from a baseline figure of 1.527 million in October 2018. “With the absence of a marked recovery in oil prices in the future, this lower production would further depress public receipts over the next two years and make the government’s aim of fiscal balance even more challenging”, adds the consultancy.
