OPEC+ Moves To End Price War With 9.7 Million B/D Cut

Abstract

A month-long price war that began in March and caused global oil prices to crash at a record pace is winding down, thanks to an unusual and historic deal between the world’s major oil producers. The big moment came after 4 days of negotiations in mid-April led by the Organization of Petroleum Exporting Countries (OPEC) and its chief outside partner Russia inked an agreement to cut crude output by 9.7 million B/D. The cuts are the biggest OPEC and its allies have ever made—and the first to involve the US. The price cuts will take effect this month and extend through June. After June, output curtailments are to be gently rolled back to 7.8 million B/D starting in July and lasting to the end of 2020. The coalition of producing nations will then loosen the reductions to 5.8 million B/D from January 2021 to April 2022. This third phase will be subject to review next year. Each country’s reduction will be determined from their October baselines—except for Russia and Saudi Arabia. The two largest producers in the agreement are each reducing output from a baseline of 11 million B/D to 8.5 million B/D. In urging immediate action, OPEC Secretary General Mohammed Barkindo reminded oil and energy ministers from more than 20 nations that at current levels of production, the world’s crude storage capacity would be topped out by May. “There is a grizzly shadow hanging over all of us,” he said. “We do not want this shadow to envelope us. It will have a crushing and long-term impact on the entire industry.” Considered an essential step toward stabilizing crude markets, the agreement did not come without some dramatics. Mexico, a key partner in the so-called OPEC+ group, refused to commit to its proposed cut of 400,000 B/D, instead saying it was working with the US to share a combined cut of 350,000 B/D. The US, meanwhile, had never previously participated in a coordinated cut led by OPEC. US President Donald Trump said he agreed to “help Mexico along” by assuming the lion’s share of reductions requested by OPEC. The decision by the US to intervene came as a surprise to many observers. “I was going to pick up the slack, and they would make it up to us at a later date,” he added, indicating that Mexico could repay the favor in “a different form.” In the end, the informal arrangement proved to be just what the coalition of producers needed to hear to grant Mexico its wish to cut back just 100,000 B/D. On 12 April, the deal was approved by OPEC+ which moved its official reduction target from 10 million B/D to 9.7 million B/D to reflect the arrangement. “It would not have seemed in the cards three weeks ago that something like this could possibly happen,” Daniel Yergin, the vice chairman at IHS Markit, said. “Among other things, it reflected a pivot on the part of President Trump from focusing on low gasoline prices to focusing on the national security implications of devastating the US oil industry. Low gasoline prices are not a big thing at a time when most everybody is at home and can’t drive anyway.”