In a historic deal on Sunday, the OPEC+ members agreed to reduce their oil output to support prices amid the COVID-19 pandemic, finally ending the catastrophic price war that was crippling the industry.
From May to June, major oil-producing powers will cut their production by 9.7 barrels per day (bpd). These restrictions will be gradually eased for two years until April 2022. The group came to this agreement after a week of bilateral calls and four days of marathon talks over video conference, with US President Donald Trump pressuring the group to take immediate action over the price decline that had put the US’ shale industry in major distress. Until now, Trump has long rallied against cartels like the OPEC.
So far, measures to slow down the spread of the coronavirus outbreak have badly affected global demand for fuel, driving down prices and straining the budgets of producers. This was further exacerbated by an ill-timed price war between Saudi Arabia and Russia, prompting Trump to threaten Riyadh with oil tariffs and other sanctions if it did not step up to solve the global market’s oversupply problem.
The OPEC+ has said that it wants oil producers in the G20 like the US, Canada, Brazil, and Norway to further cut production by 5 million bpd. While Norway and Canada have signalled a willingness to make the cuts, the US predicts that its output will steeply fall anyway due to low pricing and complicated legislation. Surprisingly, Trump also stepped in to broker a deal with Mexico, which was initially hesitant to make the demanded production cuts, offering to make extra cuts in the US on its behalf. This would allow Mexico to make fewer cuts than required by the deal right now, provided that it pays the US back in the future.
The global demand for oil has fallen by almost a third since more than three billion people worldwide are locked in their homes to contain the coronavirus outbreak. Although prices have risen since the announcement of the deal, experts at Goldman Sachs are worried that prices will drop again as the voluntary cuts made may not be large enough to offset the loss of demand due to the coronavirus, which has averaged around 19 million bpd from April to May.
Image Source: FX Empire
OPEC+ Puts an End to Oil Price War with Historic Agreement to Cut Production
April 13, 2020
