The Organisation of Petroleum Exporting Countries (OPEC) and allies led by Russia agreed on Sunday to a record cut in output to prop up oil prices amid the coronavirus pandemic and said they had an unprecedented deal with fellow oil nations, including the United States, to curb global oil supply by 20%.
Measures to slow the spread of the coronavirus have destroyed demand for fuel and driven down oil prices, Reuters said, straining budgets of oil producers and hammering the U.S. shale industry, which is more vulnerable to low prices due to its higher costs.
The group, known as OPEC+, said it had agreed to reduce output by 9.7 million barrels per day (bpd) for May and June, after four days of talks and following pressure from U.S. President Donald Trump to arrest the price decline.
The biggest oil cut ever is more than four times deeper than the previous record cut in 2008. Producers will slowly relax curbs after June, although reductions in production will stay in place until April 2022.
“The big Oil Deal with OPEC+ is done. This will save hundreds of thousands of energy jobs in the United States,” Trump wrote on Twitter, thanking Russian President Vladimir Putin and Saudi King Salman for pushing the deal through.
“I just spoke to them… Great deal for all,” Trump said.
OPEC+ said in a draft statement seen by Reuters it expected total global oil cuts to amount to more than 20 million bpd, or 20 percent of global supply, effective May 1.
OPEC+ said in a draft statement seen by Reuters it expected total global oil cuts to amount to more than 20 million bpd, or 20 percent of global supply, effective May 1.
Three OPEC+ sources said effective oil output cuts would include contributions from non-members, steeper voluntary cuts by some OPEC+ members and strategic stocks purchases by the world’s largest consumers.
The sources said non-members Brazil, Canada, Norway and the United States would contribute 3.7 million bpd. Gulf members of the Organization of the Petroleum Exporting Countries will be cutting output more steeply than agreed, OPEC+ sources said.
The sources said the International Energy Agency (IEA) would announce purchases into stocks by its members on Monday to the tune of 3 million bpd in the next couple of months.
The IEA did not immediately respond to a request for comment.
However, US President Donald Trump and tweeted the news, while Saudi Arabia’s energy ministry and Russia’s state news agency Tass both separately confirmed the deal on Sunday.
The big Oil Deal with OPEC Plus is done. This will save hundreds of thousands of energy jobs in the United States. I would like to thank and congratulate President Putin of Russia and King Salman of Saudi Arabia. I just spoke to them from the Oval Office. Great deal for all!
— Donald J. Trump (@realDonaldTrump) April 12, 2020
SEVERE DISTRESS
Trump had threatened OPEC leader Saudi Arabia with oil tariffs and other measures if it did not fix the market’s oversupply problem as low prices have put the U.S. oil industry, the world’s largest, in severe distress.
Canada and Norway had signalled a willingness to cut and the United States, where legislation makes it hard to act in tandem with cartels such as OPEC, said its output would fall steeply by itself this year because of low prices.
The OPEC+ deal had been delayed since Thursday, however, after Mexico, worried about derailing its plans to revive heavily indebted state oil company Pemex, balked at the production cuts it was asked to make.
Mexican President Andres Manuel Lopez Obrador said on Friday that Trump had offered to make extra U.S. cuts on his behalf, an unusual offer by the U.S. leader, who has long railed against OPEC.
Trump said Washington would help Mexico by picking up “some of the slack” and being reimbursed later. He did not say how that would work.
A previous agreement by OPEC+ to cut production this year fell apart because of a dispute between Russia and Saudi Arabia, triggering a price war that brought a flood of supply just as demand for fuel was crushed by the coronavirus pandemic.
Global oil demand is estimated to have fallen by a third as more than 3 billion people are locked down in their homes due to the outbreak.
An 10-15% cut in supply might not be enough to arrest the price decline, banks Goldman Sachs and UBS predicted last week, saying Brent prices would fall back to $20 per barrel from $32 at the moment and $70 at the start of the year.
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ANALYSIS-Mexican president’s nationalist oil vision fuels standoff with Saudis )
TIMELINE-OPEC’s oil output changes since the 1990s
FACTBOX-Even big OPEC+ cuts won’t offset oil demand collapse – analysts
Crude oil prices vs U.S. crude oil stocks reut.rs/34qOqEO
OPEC+ 10 million bpd cut distribution for May-June reut.rs/2VjJGwB
OPEC+ 8 million bpd cut distribution for July-December reut.rs/39S16py
OPEC+ 6 million bpd cut distribution for January 2021-April 2022 reut.rs/2JVK92Q
The OPEC+ group led by Saudi Arabia and Russia finalized plans Sunday to steeply cut oil production by a combined 9.7 million barrels per day, Bloomberg and Reuters report, capping a tumultuous, days-long stretch of international talks that included the U.S. Additional cuts are expected from producers outside the OPEC+ group.
Why it matters: The agreement marks oil producers’ first coordinated response to the COVID-19 pandemic, which has caused an unprecedented collapse in global oil demand and pushed prices to very low levels.
- As Axios reported Friday, the deal is expected to help the market avoid complete collapse, but it won’t prevent substantial damage to the sector.
- The demand and price declines are causing distress for U.S. oil producers and drilling contractors, who are steeply cutting spending and beginning to pare staff.
The intrigue: President Trump has been touting his involvement in the negotiations and has held direct talks in recent days with the heads of Russia, Saudi Arabia and Mexico.
- He tweeted on Sunday: “The big Oil Deal with OPEC Plus is done. This will save hundreds of thousands of energy jobs in the United States. I would like to thank and congratulate President Putin of Russia and King Salman of Saudi Arabia. I just spoke to them from the Oval Office. Great deal for all!”
What’s next: All eyes will now be on the market response to the agreement when oil futures trading resumes Sunday evening.
Driving the news: Sunday’s reported deal follows a tentative agreement Thursday that was temporarily derailed by Mexico’s opposition to its level of allotted cuts, as well a wider G20 energy ministers meeting Friday and talks that stretched into the weekend.
- Per multiple reports, Mexico will agree to cut its production by 100,000 barrels per day, which is 300,000 barrels per day less than its allotment in Thursday’s tentative deal that Mexican officials rejected.
- Trump said Friday that he has offered to help Mexico “pick up some of the slack,” though there have not been details on the agreement.
The big picture: “The U.S., Brazil and Canada will contribute another 3.7 million barrels as their production declines,” Bloomberg reports, adding that OPEC officials are waiting to hear from more G20 members.
- The U.S., the world’s largest producer, has not offered firm production cuts, but Trump and the Energy Department have emphasized that market forces will bring U.S. declines.
- At Friday’s G20 meeting, Energy Secretary Dan Brouillette noted estimates that U.S. production is projected to fall by 2 million barrels per day by year’s end and perhaps more.
