It took a week of feverish phone calls and video conferences among world leaders, but in the end, there was a deal.
OPEC+ will cut 9.7 million barrels per day (bpd) for two months starting from May 1. From July 1 to Dec. 31 this year, the cuts will be reduced to 7.7 million bpd and further ratcheted down to 5.8 million bpd for 16 months ending March 30, 2022.
Adjustments are calculated on a baseline from October 2018, except for Saudi Arabia and Russia where it is 11 million bpd. This constitutes a compromise, as Russia wanted to use the production of the first quarter of 2020, when the Kingdom produced 9.7 million bpd, and Saudi Arabia favored April, when it produced 12.3 million bpd.
This is the largest production cut in history and puts an end to the Saudi-Russian war for market share which started after Russia had refused to accept proposed reductions during a meeting at the beginning of March.
While it was an important step trying to give some reprieve on the supply side, the demand shock persists.
Depending on the source and model, analysts expect demand to have contracted by between 20 and 35 million bpd. In reality, it could be more and growing, given how many major economies are in lockdown and travel has all but seized as borders were closed.
The question is whether the demand cuts of the 23 OPEC+ counties will suffice to balance the market. While Brent rose more than 5 percent early Monday on the news, reality may give more weight to economic contraction as long as countries remain in lockdown. Brent was down 0.4 percent on the day by early afternoon trading at $31.36 per barrel.
Countries have one by one replenished their strategic reserves, a process nearing its end. Refineries have drastically reduced runs, because demand for gasoline, diesel and kerosene has fallen of a cliff. The world is running out of storage capacity within less than two months, which will be a natural lever reducing production.
In the end, it was Trump who helped broker an OPEC+ deal despite being famous for his dislike of OPEC.
So much for the numbers which are unprecedented. What about politics?
It all started about 10 days ago when US President Donald Trump tweeted that he had spoken to both Russian President Vladimir Putin and Saudi Arabia’s Crown Prince Mohammed bin Salman and they had agreed to cut output by between 10 and 15 million bpd.
This saw the oil price spiking by nearly 50 percent in the immediate aftermath of Trump’s announcement. It came down some, but still was around 22 percent on the day.
As a result, feverish consultations took place within OPEC+, an alliance between OPEC and 10 allied nations led by Russia. It was hard to hammer out a compromise on quotas and baselines from which to calculate them. A meeting scheduled for Monday last week had to be postponed to April 9.
The 23 countries had reached a compromise in theory last Thursday when Mexico threw a wobbly, refusing to cut its production by the required 400,000 bpd, insisting instead on 100,000 bpd. This did not work from the perspective of Russia and Saudi Arabia whose red line was that other countries should share in the pain.
Complex negotiations at the G20 level ensued on Friday, where energy ministers voiced their support of the OPEC+ draft deal during a Friday video conference. The Mexican standoff persisted until Trump got involved. In the end the OPEC+ deal was 9.7 million bpd, reflecting Mexico’s shortfall.
We have a deal. However, only the OPEC+ deal is firm. The additional 5 million bpd offered from the US, Canada, Brazil and other G20 countries are on paper only, as they reflect the impact of falling demand on production rather than representing an actual cut.
Trump’s role was pivotal as he managed to convince the leading oil producing countries to claw back from their insistence on outright cuts by non-OPEC+ producers. He also mediated in the Mexican deadlock.
The American president complemented the deal in a tweet highlighting that it would save hundreds of thousands of jobs in the US. While Trump has played a key role, there was no alternative to reaching a deal in light of the world running out of storage space.
The last few days made obvious how unprecedented the situation had become in the oil space because of the coronavirus disease (COVID-19). In history the world has never seen oil demand decline on this scale and pace. Unprecedented situations call for unusual solutions. In the end, it was Trump who helped broker an OPEC+ deal despite being famous for his dislike of OPEC.
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