OPEC+ is again on the market
After four days of high drama Saudi Arabia and Russia agreed to a record cut in their oil production in response to the coronavirus-triggered collapse in demand. Thus, from May 1, 2020, the members of OPEC + Russia and Saudi Arabia will reduce oil production by 9.7 million barrels per day. The deal will be in effect for two years, with an overall production cut of about 19 million barrels.
The drama was provided by Mexico refusing to accept its allotted cut. Mexico was asked to cut 400,000 barrels a day. It offered one-quarter of that, and from a slightly higher baseline than what was asked for.
In this situation the white knight was Donald Trump. He proposed an arrangement with Mexico’s President Andres Manuel Lopez Obrador in which 250,000 barrels a day of the “market-driven” decline in U.S. output would be rebranded as “Mexican.”
By the way, experts agreed that barrel of oil off the market beyond those that would disappear anyway because of the Covid-19-prompted collapse in demand. The Saudis and the Russians finally decided to cut their losses and swallow Mexico’s lack of genuine commitment. The alternative would have been to allow the commodity markets to open on Monday morning with the group still in disarray and to risk another big price slump.
The deal raises some even bigger questions than Mexico. Russia, for example, is to cut its output by 2.5 million barrels a day over the next three weeks. Really? The head of state-controlled oil company Rosneft, was a fierce critic of Russia’s modest contribution to previous reductions.
U.S. Energy Secretary Dan Brouillette told that the oil market collapse will impose some 2 million barrels a day of American output cuts by the end of the year without any government intervention. Some predictive models, he added, see the drop as big as 3 million barrels.
Experts noted that Russia previously rejected such “free market” cuts, arguing that production falling in response to a lack of demand is not an output reduction. But in the end it capitulated, along with the other OPEC+ countries. There was no mention in the OPEC+ communique of the deal being dependent on the actions of anyone else outside the group. Other non-OPEC+ producers, including Canada, Brazil and Norway have also contributed “market-driven” output cuts.
This is the second time in less than five years that Saudi Arabia’s attempt to pursue a pump-at-will policy has collapsed. After just one month, this one has lasted an even shorter time than the previous effort, brought to an end by the OPEC+ deal with Russia and other countries toward the end of 2016.
International analysts noted these are quite clearly extraordinary times, with an unprecedented demand collapse. In their opinion, the war over market share between the Saudis, the Russians and the Americans resumes once the lockdowns ease and people want oil again. This is a temporary truce rather than lasting peace between the three biggest producers.