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Photo: Andrey Rudakov / Bloom |
The world’s largest oil producers have reached a landmark agreement to curb global crude oil production and end the devastating price war.
After a week of marathon bilateral talks and four days of videoconferencing with ministers from around the world, including the OPEC + Alliance and the G20, an agreement was finally reached to address the impact of the global pandemic on demand.
The talks nearly collapsed due to resistance from Mexico, but resumed their collapse after emergency diplomacy over the weekend when the clock ticked until markets opened.
OPEC + will reduce yields by 9.7 million barrels per day, just below the initial proposal of 10 million barrels. The United States, Brazil and Canada will contribute another 3.7 million barrels as production decreases. OPEC officials are still waiting to hear more from the 20-member group, although it is unclear whether these figures will represent actual cuts or simply inactive production due to market mechanisms.
The starting point for the decrease in yields will be OPEC + production volumes from October 2018. Saudi Arabia and Russia will be the most affected: Both parties plan to produce 8.5 million barrels per day in May and June. These are significant cuts compared to current oil production. The kingdom should reduce its production by about 30 percent, a Russia – by about 15 percent.
Mexico he appears to have won the diplomatic victory, as he is required to cut only 100,000 barrels per day, less than his proportional share.
The decline in production is a desperate attempt by oil exporters to stem the decline in oil prices. Crude oil prices have fallen 60 percent since the end of January. The spread of the coronavirus pandemic and global travel restrictions have led to decreased demand for oil. At the same time, Saudi Arabia and Russia have been waging a price war in the past four weeks and flooding the markets with cheap crude. The result was historically unique in excess of oil supplies and rapidly growing stocks.
Under the agreement, production reductions should be phased out starting in July: In the second half of the year, OPEC + plans to cut oil production by just eight million barrels per day compared to April levels. Starting in January 2021, the reduction in production should be reduced to six million barrels. In doing so, the OPEC + alliance of 23 countries intends to respond to the unprecedented decline in oil demand following the spread of the coronavirus,
In the context of the fact that the coronavirus has paralyzed air and land travel, the demand for gasoline has plummeted and oil prices have fallen to 18-year lows. This has threatened the future of the US shale industry. USA And the stability of oil-dependent countries, while posing even more challenges for central banks struggling with economic recessions due to the pandemic.
On Thursday, the price of US crude oil depreciated by more than 9% as traders speculated that production cuts would not go far enough. Oil markets closed on Friday for Easter.
The question now is whether the cuts will be enough to detach the raw material from the fund, as demand remains very low.
In the context of the fact that the coronavirus has paralyzed air and land travel, the demand for gasoline has plummeted and oil prices have fallen to 18-year lows. This has threatened the future of the US shale industry. USA And the stability of oil-dependent countries, while posing even more challenges for central banks struggling with economic recessions due to the pandemic.
In the context of blockades in motion and the economy in many countries of the world, the large number of deaths in New York and unemployment in the United States, the oil market is now much more concerned with consumption than with supply. OPEC itself recognized the challenge, and its ministers warned that the bases were “terrible.”
The talks also reveal how fragile the oil exporters union is. The outcome of the talks was expected on Thursday. Mexico, however, did not want to support the rate of decline in production. Under the agreement, the country had to cut production by 400,000 barrels per day, but only insisted on cutting 100,000 barrels. Mexico’s energy minister Rosio Nale left the conference call on Thursday night, initially preventing OPEC + from formally deciding on the deal.
On Friday, President Andrés Manuel López Obrador finally announced a surprising and extremely unusual decision: the President of the United States, Donald Trump, has assured that the United States will intervene and will take over half of the cuts that Mexico will have to take in under the OPEC + agreement. However, Saudi Arabia did not want to get involved in the deal almost to the end, furthermore, so it is not entirely clear how to apply neighborhood assistance.
In the end, however, Mexico prevailed. The country has to reduce its production volume by only 100,000 barrels. OPEC + members reduced yields by a total of 9.7 million barrels per day, staying below the 10 million barrels that Saudi Arabia wanted to boost.
For the Kingdom, this was not the only diplomatic defeat on Easter weekend: on Friday, according to a plan by Saudi negotiators, more oil-exporting countries in the group of the 20 largest industrialized countries (G20) had than agree to a reduction agreement.
But the inability to reach an agreement within OPEC + influenced the talks of the G20 energy ministers on Friday. They could not agree on binding cuts on Good Friday. The final statement by the G20 energy ministers weakened significantly compared to a project prepared by Saudi Arabia and published by Bloomberg.
For example, energy ministers spoke in favor of monitoring the stability of oil markets. A passage that provides for “corrective measures” if the oil market becomes unbalanced does not enter the final version of the G20 statement.
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