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OPEC, Russia and other oil producing nations agreed on Sunday to cut output by a record amount, representing about 10 percent of global supply, to support oil prices amid the coronavirus pandemic.
The group, known as OPEC+, agreed to reduce output by 9.7 million barrels per day (bpd) for May-June, after four days of marathon talks and following pressure from US President Donald Trump to arrest the price decline.
Two OPEC+ sources told Reuters the deal had been sealed in a video conference on Sunday, and the agreement was confirmed in a statement by Kazakhstan’s energy ministry.
“We have demonstrated that OPEC+ is up and alive,” Saudi Energy Minister Prince Abdulaziz bin Salman told Bloomberg News in an interview minutes after he clinched the deal. “I’m more than happy with the deal,” he added.
Under the deal, Saudi Arabia will cut its production just a fraction under 8.5 million barrels a day – its lowest level since 2011.
The OPEC+ deal measures the Saudi cut from a baseline of 11 million barrels a day, the same as Russia. But in reality, the kingdom’s production will decline from a much higher level.
In April, Saudi Arabia boosted output to a record 12.3 million barrels a day as part of its war with Russia for market share, Bloomberg said.
In the biggest output cut ever, oil-producing countries agreed to keep their gradually decreasing curbs on production in place for two years until April 2022.
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 because of its higher costs.
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.
“Unprecedented measures for unprecedented times,” said Ed Morse, a veteran oil watcher who is head of commodities research at Citigroup. “Unprecedented in historical discussions of production cuts, the US played a critical role in brokering between Saudi Arabia and Russia for the new OPEC+ accord,” he was quoted as saying by Bloomberg.
OPEC+ has said it wanted producers outside the group, including the United States, Canada, Brazil and Norway, to cut a further 5 percent or 5 million bpd.
Canada and Norway had signaled a willingness to cut output 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 amid the low prices.
The signing of the OPEC+ deal had been delayed since Thursday, however, after Mexico baulked 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 a Trump 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 this would work.
Mexican standoff
Still, Mexico won a diplomatic victory as it will only cut 100,000 barrels – less than its pro-rated share, having blocked the deal since the plan was first revealed, Bloomberg said.
“This is at least a temporary relief for the energy industry and for the global economy,” Rystad Energy’s head of analysis Per Magnus Nysveen told CNBC in an email.
“Even though the production cuts are smaller than what the market needed and only postpone the stock building constraints problem, the worst is for now avoided.”
Still, even a 15 percent cut in supply might not be enough to arrest the price decline, banks Goldman Sachs and UBS said last week, adding that Brent prices may fall back to $20 per barrel from $32 at the moment and $70 at the start of the year.
On Sunday, oil futures were little changed even after the major oil producers reached their deal on the output cut, with analysts saying the agreement was insufficient to head off oversupply as the pandemic hammers demand.
Global oil demand is estimated to have fallen by a third as more than 3 billion people are locked down in their homes amid the coronavirus outbreak.
Meanwhile, Saudi Arabia delayed a key pricing decision for its crude exports yet again. State producer Saudi Aramco is now set to decide on and announce pricing for its May crude exports on Monday, according to a person with knowledge of the situation, Bloomberg reported.
The pricing was originally scheduled for 5 April.
