The Organization of Petroleum Exporting Countries and allies (OPEC+) yesterday finalized a historic agreement to cut production by 9.7 million barrels per day, the single-largest cut in history, after days of wrangling between the largest oil producers in the world.
Sunday’s emergency meeting was the second in four days, coming as members scrambled to reach an agreement meant to support falling prices as the coronavirus outbreak continues to destroy demand.
The cartel initially proposed on Thursday a production cut of 10 million barrels a day, the equivalent of 10 percent of global supply, but Mexico opposed the amount it was asked to cut, delaying the final deal. Under the new agreement, the North American nation will slash 100,000 barrels per day, instead of the initial 400,000 barrels per day request.
The supply cut will begin on May 1 and extend through the end of June. The cuts will then narrow to 7.7 million barrels per day from July through the end of 2020, and 5.8 million barrels per day from January 2021 through April 2022. The 23-nation group is expected to meet again in June to determine if further action is needed.
OPEC+ is banking on nations outside of the group such as the United States, Canada, and Norway, to also cut production in an effort to shore up prices. Despite the record size of the cut, however, analysts say it is still not large enough to combat the plunge in global oil demand, estimated to have fallen by a third as more than three billion remain locked down in their homes due to the pandemic.
Even a 15 percent cut in supply might not be enough to arrest the price decline, banks Goldman Sachs and UBS said last week, saying Brent prices would fall back to $20 per barrel from around $30 at the moment and $70 at the start of the year. The benchmark is in the bear market territory, down 53 percent since rising to a January peak.
The breakthrough resolution also ends an oil price war between the cartel’s de facto leader Saudi Arabia and Russia which started after Moscow refused to agree with a Saudi proposal early last month to trim output in response to the coronavirus pandemic.
The ensuing spat over market share saw both top producers flood the market with an oversupply of oil, which further pressured oil prices and severely affected oil-dependent economies like Nigeria. Africa’s biggest oil exporter and economy has now agreed to implement the OPEC+ agreement, with the hope of boosting earnings, minister of state for petroleum, Timipre Sylva, said on the sidelines of the virtual meeting yesterday.
The development is expected to earn Nigeria an additional $2.8 billion and a $15 rise in the international price of crude oil which currently hovers around $30 after implementation begins. “This will enable the rebalancing of the oil markets and the expected rebound of prices by $15 per barrel in the short term,” Sylva said. “This also promises an appropriate balancing of Nigeria’s 2020 budget that has been rebased at $30 per barrel.”
