The Organization of the Petroleum Exporting Countries and other oil-producing countries including Russia on Thursday agreed to record oil production cuts, the New York Times reported, citing a person with knowledge of the matter.
The resolution effectively puts an end to the 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 based on an oversupply of oil has shaken the global oil market and severely affected oil-dependent economies like Nigeria.
About 10 million barrels a day is now expected to be slashed, or around 10 percent from normal production levels, in May and June, according to the agreement reportedly reached at the expanded virtual meeting of OPEC+ and other oil producers yesterday. Possible further trims could come from a meeting of the Group of 20 nations today, NYT said.
Russia and Saudi Arabia, the world’s largest producers, will each reduce their daily oil output by about 5.5 million barrels with all members agreeing to cut supply by 23 percent, delegates at the meeting told Bloomberg, asking not to be named. The move is expected to boost oil prices – international benchmark Brent crude has fallen to as low as $22 per barrel, the lowest in nearly two decades, before rising steadily to about $30 – and revive the market from a devastating coronavirus-induced slump.
That will bring some relief to oil producers, especially resource-intensive developing economies. For instance, Nigeria had to cut its crude oil benchmark price in the 2020 budget to $30 from $57 a barrel, while production remains at initial estimates of 2.18 million bpd. Africa’s largest economy and biggest oil exporter also had to slash as much as $4.9 billion from its record budget for the year.
The historic deal will go some way towards balancing the oil market but the long-term impact on oil prices, in the face of the unprecedented demand plunge caused by the raging pandemic, has been severally downplayed by experts. Deeper production cuts by the OPEC coalition and other major oil producers would still be unable to prevent an enormous global inventory build this quarter due to unprecedented demand destruction, the International Energy Agency had warned.
Fatih Birol, Executive Director of the IEA, which represents nations that consume oil, told Reuters earlier that even if OPEC+ and other producers were to discuss, agree to, and implement a collective cut of 10 million barrels per day, global oil inventories would still rise by 15 million bpd in the second quarter even as the world runs out of storage space.
“Today will go down in history. The biggest-ever production cut has just been agreed upon by what can now be deemed the largest oil cartel in history,” Oil Price said in an email on the production cut agreement. “Despite agreeing to a 10 million barrel per day production cut OPEC++ has failed and prices have crashed as a consequence,” it added after oil peaked earlier but later fell to close near the lows of the day even with news of the deal.
“No achievable production cut agreement was ever going to counter the extreme demand destruction COVID-19 has caused,” the energy-focused research firm and publication added, citing its intelligence communique. “OPEC has lost its power and, in the coming weeks, markets are going to realize just how dire the situation is.”
