Oil prices fluctuate despite deal on production cuts
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OPEC, Russia and other oil-producing nations on Sunday finalized an unprecedented production cut of nearly 10 million barrels, or a tenth of global supply, in hopes of boosting crashing prices amid the coronavirus pandemic and a price war, officials said.
Oil prices fluctuated yesterday as the positive impact of the cuts was offset by concerns they will not be sufficient. “The pure size of the cut is unprecedented, but, then again, so is the impact the coronavirus is having on demand,” said Mohammed Ghulam, an energy analyst at Raymond James.
“This is at least a temporary relief for the energy industry and for the global economy. This industry is too big to be let to fail and the alliance showed responsibility with this agreement,” said Per Magnus Nysveen, the head of analysis at Rystad Energy. “Even though the production cuts are smaller than what the market needed and only postponed the stock building constraints problem, the worst is for now avoided.”
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 30 million bpd as more than 3 billion people are locked down in their homes due to the outbreak.
Measures to slow the spread of the coronavirus have 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.
OPEC+ said on Sunday it had agreed to reduce output by 9.7 million barrels per day for May and June, after four days of talks and following pressure from US President Donald Trump to arrest the price decline.
Trump tweeted: “The big Oil Deal with OPEC+ is done. This will save hundreds of thousands of energy jobs in the United States.”
OPEC Secretary General Mohammad Barkindo called the cuts “historic.”
“They are largest in volume and the longest in duration, as they are planned to last for two years,” he said.
Non-members’ contributions
The oil cut 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. According to an OPEC statement on the deal, from July through the end of 2020, the cut will decrease to 7.7 million bpd, and will then be followed by an adjustment of 5.8 million bpd for another 16 months.
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 said that real effective cuts by OPEC+ would total 12.5 million 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 million to 5 million bpd.
Three OPEC+ sources said the International Energy Agency, the energy watchdog for the world’s most industrialized nations, would announce purchases into stocks by its members to the tune of 3 million bpd in the next couple of months.
The IEA said it would provide an update tomorrow 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.
US producers have already been reducing output. The American Petroleum Institute lauded the global pact, saying it will help get other nations’ state-owned oil production to follow the lead of US producers that are trying to adjust to plunging demand.
US Energy Secretary Dan Brouillette said the US did not make commitments of its own production cuts, but was able to show the obvious — that plunging demand because of the pandemic is expected to slash US oil production.
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.
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