OPEC, US and Russia approve biggest oil cut in history
OPEC and the alliance of the world's largest oil producers, led by Russia, agreed on Sunday to record production cuts to prop up oil prices amid the coronavirus pandemic. Unprecedented deal could cut global oil supplies by 20%.
Measures to slow the spread of the coronavirus disrupted fuel demand and led to lower oil prices, leading to cuts in oil producers' budgets and undermining the US shale industry, which is more vulnerable to lower prices due to higher costs.
The group known as OPEC + said it agreed to cut production by 9.7 million barrels per day in May and June after four days of negotiations and after pressure from the US President Donald Trump to stop falling prices.
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OPEC + sources said they expect total global oil production cuts to total more than 20 million barrels per day, or 20 percent of global supply, starting May 1. OPEC had the same figure in its draft statement, but removed it from the final version.
The largest decline in oil production will be more than four times larger than the previous record decline in 2008. Producers will gradually loosen restrictions after June, although production cuts will persist until April 2022.
In a White House statement, Trump welcomed the commitment of Saudi Arabia and Russia «return oil production to levels consistent with the stability of the global energy and financial markets».
Earlier on Twitter, Trump wrote: «The big oil deal with OPEC + has been completed. This will save hundreds of thousands of energy jobs in the United States».
Thanking the President of Russia Vladimir Putin and the king of Saudi Arabia Salman for pushing the deal, Trump added: «I just spoke to them … Great deal for everyone».
Oil demand has dropped by about a third due to the coronavirus pandemic. Oil prices jumped more than $ 1 a barrel in post-deal Monday trading, but gains have been capped by concerns that this will not be enough to remove excess supply from the market..
Overall global cuts will include tougher voluntary cuts by some OPEC + members and strategic equity purchases by the world's largest consumers.
Saudi Arabia's Energy Minister Prince Abdulaziz bin Salman told Reuters that real effective OPEC + cuts would be 12.5 million bpd as Saudi Arabia, the United Arab Emirates and Kuwait would cut supplies more, given the rise in production in April.
Three sources in OPEC + said non-member countries (Brazil, Canada, Indonesia, Norway and the United States) will cut production by 4-5 million barrels per day.
The International Energy Agency (IEA) will announce the purchase of shares of its members for an amount equal to the cost of 3 million barrels of oil per day in the next couple of months.
The IEA said it will provide an update on Wednesday when it releases its monthly report. United States, India, Japan and South Korea said they could buy oil to replenish stocks.
Trump threatened OPEC leader Saudi Arabia with import duties on oil and other measures if the problem of oversupply in the market was not resolved, as low prices put the US shale industry, the largest in the world, in a difficult position.
Canada and Norway have expressed willingness to cut, and the United States, where legislation makes it difficult to tandem with cartels such as OPEC, have said their production will drop sharply this year due to low prices..
Canadian government welcomes OPEC + deal, pledging commitment to achieving price certainty and economic stability.
The deal was delayed after Mexico, worried about the failure of its plans to rebuild the heavily indebted state oil company Pemex, backed out of the proposed production cut..
President of Mexico Andres Manuel Lopez Obrador said on Friday that Trump has proposed additional cuts in US production, an unusual proposal from a US leader who has long protested against OPEC's actions.
Trump said Washington would help Mexico and receive compensation later. He did not explain how it would work..
The previous OPEC + agreement to cut production this year fell apart due to a dispute between Russia and Saudi Arabia that sparked a price war that triggered a growing supply flow while fuel demand was undermined by the coronavirus pandemic.
Global oil demand has dropped by about 30 million barrels per day as more than 3 billion people are locked in their homes due to the outbreak of the pandemic.
Goldman Sachs and UBS predicted last week that Brent prices will fall to $ 20 a barrel as the cut will not be enough to offset the severe disruption in demand due to restrictions to curb the coronavirus outbreak..