Oil Price War Ends With Historic OPEC+ Deal to Slash Output
(Bloomberg) -- The world’s top oil producers pulled off a historic deal to cut global petroleum output by nearly a 10th, putting an end to a devastating price war but not going far enough offset the impact of the coronavirus pandemic.
A week-long marathon of bilateral calls and ministerial video conferences joined the OPEC+ alliance and the Group of 20 nations in an unprecedented agreement. Together they have helped to lift oil prices from almost 20-year lows, but the focus of the market now shifts to whether they can dent a supply glut that keeps growing as the virus shuts down the global economy.
The deal may turn out to be “just a plaster on an open wound,” consultant JBC Energy GmbH said in a note. After swinging wildly in the first few minutes of trading, crude was down slightly London on Monday.
Despite the skepticism, the agreement still represents an important victory for the alliance between the Organization of Petroleum Exporting Countries and allies including Russia, which just a few weeks ago appeared to be dead. And it wasn’t easy, with talks almost falling apart late last week because of resistance from Mexico. They came back from the brink after a weekend of urgent diplomacy, and an intervention from President Donald Trump, helped to broker the final compromise.
“Unprecedented measures for unprecedented times,”said Ed Morse, a veteran oil watcher who is head of commodities research at Citigroup Inc. “Unprecedented in historical discussions of production cuts, the U.S. played a critical role in brokering between Saudi Arabia and Russia for the new OPEC+ accord.”
OPEC+ will cut 9.7 million barrels a day -- just below the initial proposal of 10 million.
“We have demonstrated that OPEC+ is up and alive,” Saudi Energy Minister Prince Abdulaziz bin Salman told Bloomberg News in an interview minutes after the deal was done. “I’m more than happy with the deal.”
The accord caps a tumultuous month when Brent crude, the global benchmark, plunged to its lowest in nearly two decades, falling toward $20 a barrel. Earlier this year, it traded above $70 a barrel. OPEC+ ministers had to race onto a video conference call on Easter Sunday, less than four hours before the oil market reopened, to close the deal.
Brent futures jumped 8% in the first seconds of trading on Monday in Asia, but were down 2% at $30.85 a barrel at 10:35 a.m. in London.
With the virus paralyzing air and ground travel, demand for gasoline, jet-fuel and diesel is collapsing. That threatens the future of the U.S. shale industry, the stability of oil-dependent states and squeezes the flow of petrodollars through an ailing global economy.
On top of the OPEC+ agreement, oil producers in the G-20 will contribute their own output reductions, but those measures were in no way equivalent to the immediate cuts promised by the cartel.
Production declines due to the effects of low prices in the U.S., Brazil and Canada will be counted, deepening the global supply reduction by 3.7 million barrels a day, with other G-20 states contributing 1.3 million. Those curbs could take months, perhaps more than a year, to come into effect and may not even happen if crude prices recover significantly.
Still, the involvement of G-20 states that have typically been critics of OPEC+ was politically significant.
“OPEC+ started the fire, and it was their responsibility to put it out,” Jason Kenney, the premier of Alberta, Canada’s biggest oil-producing province, said in a Twitter post. “Many challenging months ahead with very low demand and huge inventories, but at least now there is path to recovery.”
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The biggest winner appears to be Trump, who refused to actively cut American oil production and personally brokered the deal over phone calls with Mexican President Andres Manuel Lopez Obrador, Russian President Vladimir Putin and King Salman of Saudi Arabia.
With the U.S. president’s help, Mexico won a diplomatic victory. It will only cut 100,000 barrels -- a quarter of what was initially proposed -- having blocked the deal since it was first revealed on Thursday. Now its future inside OPEC+ is uncertain, as it’s expected to decide over the next two months whether to leave the alliance, delegates said.
“Perhaps what’s most remarkable about Saudi Arabia and Russia delivering one of the largest supply cuts ever is that the person who brought them back together and pressured hardest to cut was historically OPEC’s harshest critic, President Trump,” said Jason Bordoff, a former White House official during the Obama administration and now at Columbia University.
Trump became the first American president to push for higher oil prices in more than 30 years, reversing his personal opposition to the cartel.
“I hated OPEC. You want to know the truth? I hated it. Because it was a fix,” Trump told reporters at the White House last week. “But somewhere along the line that broke down and went the opposite way.”
‘Too Little and Too Late’
The production restraints are set to last for about two years, though not at the same level as the initial two months. Copying the model adopted by central banks to taper off their bond buying, OPEC will also reduce the size of the cuts over time. After June, the 10 million barrel cut will be tapered to 7.6 million a day until the end of the year, and then to 5.6 million through 2021 until April 2022.
The deal doesn’t take effect until May 1, potentially leaving some OPEC+ countries that have significantly increased production over the last month to keep flooding the market for nearly another three weeks. Azerbaijan’s Energy Ministry said by email on Monday that Saudi Arabia, Kuwait and the United Arab Emirates said they won’t pump about 2.7 million barrels a day of extra crude they had planned for April.
Goldman Sachs Group Inc. called the cuts “too little and too late,” saying they’d only lead to an actual reduction of about 4.3 million barrels a day from first-quarter levels. “Ultimately, this simply reflects that no voluntary cuts could be large enough to offset the 19 million barrels a day average April to May demand loss due to the coronavirus,” the bank’s analysts wrote in a report.
Under the terms, Saudi Arabia will cut its production to about 8.5 million barrels a day -- its lowest level since 2011. The OPEC+ deal measures the Saudi cut from a baseline of 11 million barrels a day, the same as Russia. But in reality the kingdom’s production will decline from a much higher level. In April, Saudi Arabia boosted output to a record 12.3 million barrels a day as part of its war with Russia for market share.
“We want to regain the stability of the oil market,” Prince Abdulaziz said.
With countries around the world extending their lockdowns, the death toll mounting in New York, and unemployment exploding in America, the oil market is now far more worried about consumption than supply. OPEC itself acknowledged the challenge, with its chief warning ministers demand fundamentals were “horrifying.” In an internal presentation seen by Bloomberg News, OPEC told ministers it expected global oil demand to plunge 20 million barrels a day in April.
“Demand is down by more than double the 9.7 million barrels-a-day cut agreed,” said Amrita Sen, chief oil analyst at consultant Energy Aspects Ltd. “And with the issue with Mexico taking so long to sort, the credibility of the group has taken a hit”.
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