OPEC, Russia End Oil Price War With Biggest-Ever Cut To Support Market Amid Coronavirus Pandemic
Azerbaijan hails oil cut deal
The Declaration of Cooperation on reducing the daily oil production has been approved at the 10th video-conferencing meeting of OPEC and non-OPEC countries, Azerbaijan’s Energy Ministry said.
At the meeting, OPEC+ countries agreed with Mexico’s proposal on reducing its output by 100,000 barrels per day. In order to offset the remaining volumes of Mexico’s quotas, the U.S. has agreed to reduce its production by additional 300,000 barrels.
The meeting participants have thereby agreed to reduce their production by 9.7m barrels per day from May 1.
Azerbaijan has also supported the OPEC+deal and Energy Minister Parviz Sahbazov hailed the deal as this move of oil producing countries will stabilize the oil market.
“Today’s meeting and the resolute position of OPEC+ allowed to eliminate the obstacles and uncertainties related to the implementation of the output cut deal. The mechanism of balancing the oil market with production interventions is supported globally and this support will contribute to the stabilization of the oil market,” he said.
“At the same time, this decision will encourage the countries, which do not participate in OPEC+ to cut their output,” the minister added.
During the meeting held April 9, OPEC and non-OPEC countries agreed to reduce oil production in three stages from May 1 to April 2022.
What made the deal possible?
The world's top oil producers hammered out a historic deal to cut global petroleum output by nearly 10m barrel per day, putting an end to the devastating price war between Saudi Arabia and Russia
OPEC and allies led by Russia agreed on 12 April to a record cut in output to prop up oil prices amid the coronavirus pandemic in an unprecedented deal with fellow oil nations, including the United States, that could curb global oil supply by 20%.
Measures to slow the spread of the coronavirus have destroyed demand for fuel and driven down oil prices, straining budgets of oil producers and hammering the US shale industry, which is more vulnerable to low prices due to its higher costs.
Futures in London rose around 2% to above $32 a barrel after the OPEC+ alliance agreed to a plan to slash production by 9.7m barrels a day beginning in May, ending a price war between Saudis and Russia. The group struck a deal after days of intense negotiations after Mexico declined to endorse the original agreement reached on April 9.
The U.S., Brazil and Canada will contribute another 3.7m barrels on paper as their production declines, and other Group of 20 nations will cut an additional 1.3m. The G-20 numbers do not represent real voluntary cuts, but rather reflect the impact that low prices have already had on output and would take months, or perhaps more than a year, to occur.
OPEC+ sources said they expected total global oil cuts to amount to more than 20 million bpd, or 20 percent of global supply, effective 1 May. OPEC had the same figure in its draft statement but removed it from the final version.
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.
In a statement from the White House, Trump welcomed the commitment by Saudi Arabia and Russia “to return oil production to levels consistent with global energy and financial market stability.”
Earlier on Twitter, Trump wrote: “The big Oil Deal with OPEC+ is done. This will save hundreds of thousands of energy jobs in the United States.”
Thanking Russian President Vladimir Putin and Saudi King Salman for pushing the deal through, Trump added: “I just spoke to them… Great deal for all.”
Oil demand has dropped by around a third because of the coronavirus pandemic. Oil prices jumped more than $1 a barrel in Monday trading after the agreement, but gains were capped amid concern that it would not be enough to head off oversupply with the coronavirus pandemic hammering demand.
Total global cuts will include contributions from non-members, steeper voluntary cuts by some OPEC+ members and strategic stocks purchases by the world’s largest consumers.
Saudi Energy Minister Prince Abdulaziz bin Salman told Reuters that real effective cuts by OPEC+ would total 12.5m bpd because Saudi Arabia, the United Arab Emirates and Kuwait would cut supplies steeper given higher output in April.
Three OPEC+ sources said non-members Brazil, Canada, Indonesia, Norway and the United States would contribute 4-5m bpd.
Three OPEC+ sources said the International Energy Agency (IEA), the energy watchdog for the world’s most industrialised nations, would announce purchases into stocks by its members to the tune of 3m bpd in the next couple of months.
The IEA said it would provide an update on Wednesday when it releases its monthly report. The United States, India, Japan and South Korea have said they could buy oil to replenish reserves.
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 US 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 Canadian government said in a statement it welcomed the OPEC+ deal, saying it was committed to achieving price certainty and economic stability.
The 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 US cuts on his behalf, an unusual offer by the US 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 around 30m bpd as more than 3bn people are locked down in their homes due to the outbreak.
Banks Goldman Sachs and UBS predicted last week that Brent prices would fall back to $20 per barrel as cuts would not be enough to help offset severe demand destruction because of the restrictions to curb the coronavirus outbreak.