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Saudi Arabia and Russia ended their oil price war on Sunday by concluding an agreement to make the largest oil production cuts in history, following pressure from United States President Donald Trump to support a devastated energy sector. due to the coronavirus pandemic.
OPEC said it would cut 9.7 million barrels per day in oil production in May and June, equivalent to almost 10 percent of world supply, and would continue with lower reductions until April 2022, in an effort to stabilize world crude oil markets.
The cuts would be more than double those made by the cartel during the global financial crisis.
OPEC officials added that the cuts could end up being much larger, around a fifth of global supply. However, this would include forced declines to off-cartel producers from the recent collapse in oil prices, such as those in the battered US shale sector. USA
Trump welcomed the announcement, said it would protect America’s jobs, and congratulated Saudi Arabia and Russia.
Oil prices were volatile in reaction to the deal, with the price of Brent crude, the international benchmark, gaining as much as 8 percent to trade at $ 33.99 a barrel. West Texas Intermediate, the benchmark for the United States, rose as much as 8.7 percent to $ 24.74 a barrel. Operators doubted the cuts would hit the headline or offset a collapse in demand that is expected to be at least twice the size of OPEC’s supply reductions.
Shares in Asia fell after the deal, with Topix of Japan down 0.7 percent and Kospi of South Korea falling 0.6 percent. The Hong Kong and Australian markets closed on Easter Monday.
It is also understood that the large consuming countries that supported the agreement, including the USA. The US, China, Japan, India and South Korea are preparing to buy oil to increase their reserves and narrow the market.
The Opec + group deal, an alliance between the cartel and other producers, including Russia, was first negotiated on Thursday. It was backed by the United States and the G20 on Friday, but had threatened to fall apart after Mexico sought an exemption.
But under pressure from the United States, Saudi Arabia allowed Mexico to cut by a smaller margin than its Opec + peers. That resulted in the group’s overall restrictions amounting to just under 10 million b / d initially promised.
Saudi Arabia, the United Arab Emirates and Kuwait, the big producers of the Gulf cartel, will deepen their own cuts, adding to the total, officials said.
OPEC plans to include declines in non-OPEC producers that may not be enough to reassure traders who have tried to balance the loss of up to 30 percent of global demand as economies have closed to stop the spread of the coronavirus.
Analysts said cuts of less than 7 million barrels per day could be delivered because high baselines had been used to calculate the cuts. The highest figure of 20 million barrels per day, including production declines caused by lower prices, was also met with skepticism.
“There is a lot of double counting, creative accounting, and obfuscation to reach this 20 million barrel a day figure,” said Amrita Sen of Energy Aspects.
The deal marks a turnaround for Trump, a frequent OPEC critic, who pressured the cartel to make cuts to support oil prices. The President of the USA USA It has previously blamed OPEC for raising fuel prices for the average American consumer.
“The big oil deal with Opec Plus is done,” Trump said on Twitter on Sunday. “This will save hundreds of thousands of energy jobs in the United States. I would like to thank and congratulate President Putin of Russia and King Salman of Saudi Arabia. I just spoke to them from the Oval Office. Great deal for everyone!
Trump pressured Saudi Crown Prince Mohammed bin Salman and President Vladimir Putin of Russia in recent days to secure the deal, and even last week revealed the size to be agreed. For Putin, it has provided a likely boost to Russia’s economy and a new forum to establish ties with the President of the United States.
“Under Donald Trump’s watchful eye, Saudi Arabia apparently had to relax its position that everyone cuts in the same proportion,” said Helima Croft of RBC Capital Markets. “Trump essentially became the de facto president of OPEC.”
On Saturday, US senators from oil-producing states held intense calls with Saudi officials, including Prince Abdulaziz bin Salman, the energy minister, and threatened to “reevaluate” Washington’s relationship with the kingdom.
“Washington’s centrality to closing deals today can mark a de facto expansion of Opec + and a further step in a global shift toward managed markets,” said Kevin Book of Clearview Energy Partners.
G20 nations such as the United States, Canada and Brazil supported the deal, but were not required to make official commitments to cut.
But countries will cut supply in any case, as weak oil prices force oil companies to cut capital spending. US production could still drop as much as a quarter, or 3 million b / d, if the deal raises oil prices to $ 35 a barrel, said Scott Sheffield, head of Pioneer Natural Resources, a large shale producer.
The Opec + agreement marks the latest in a series of efforts by governments and international institutions to support the global economy in the face of the Covid-19 crisis, which threatens to lead countries around the world into a deep recession.
It is not yet clear if the deal will be enough to support the oil market. Traders have said producer cooperation removes fear of a free-falling market, but storage capacity could still be overwhelmed in the coming weeks, depending on how long locks last and other measures.
Oil prices are still about half their price in January, but recovered from 18-year lows of around $ 20 after plans for deep cuts came to light two weeks ago.
Saudi Arabia is expected to increase its crude oil export prices on Monday after slashing them last month.
Additional reports by Henry Foy in Moscow and Jude Webber in Mexico City
