Russia, OPEC, alongside other oil producing nations, agreed to the biggest-ever oil cut in output to boost oil prices that could curb global oil supply by 20% during the coronavirus pandemic.
In an unprecedented deal signed made on Sunday, fellow oil nations, including the United States, put measures in place and agreed to reduce output by 9.7 million barrels per day (bpd) for May-June, after four days of intense discussions and pressure from US President Donald Trump.
The signing of the OPEC+ deal had been delayed since Thursday, as Mexico held up negotiations.
Mexican President Andres Manuel Lopez Obrador said on Friday that Donald Trump had offered to make extra cuts on his behalf, an unusual move by the US president who has often disagreed with OPEC.
Trump said Washington would help Mexico by picking up “some of the slack” and being reimbursed later. He did not say how this would work.
Meanwhile, OPEC+ sources said they expected total global oil cuts to amount to more than 20 million bpd, or 20 percent of global supply from 1 May.
The deal, considered the biggest oil cut ever, is more than four times deeper than the previous record cut in 2008. Producers will slowly relax curbs after June, although reductions in production will stay in place until April 2022.
A previous agreement by OPEC+ to cut production this year fell apart because of a dispute between Russia and Saudi Arabia, triggering a price war that brought a flood of supply just as demand for fuel was crushed by the coronavirus pandemic.
Global oil demand is estimated to have fallen by a third as more than 3 billion people are locked down in their homes due to the coronavirus outbreak.
Total worldwide cuts will include contributions from non-members, higher voluntary cuts by some OPEC+ members and strategic stocks purchases by the world’s largest consumers.
Under the deal, Saudi Arabia will cut its production just a fraction under 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. However, the kingdom’s production will decline from a greater level.
Saudi Energy Minister Prince Abdulaziz bin Salman said that real effective cuts by OPEC+ would total 12.5 million bpd as Saudi Arabia, the United Arab Emirates and Kuwait will cut supplies to ‘accomodate’ the crisis.
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.
Measures to slow the spread of the coronavirus have destroyed demand for fuel and driven down oil prices. This has put a strain on budgets of oil producers and drastically impacted the US shale industry, which is more vulnerable to low prices due to its higher costs.
Last week, investment bank Goldman Sachs said that a 15% cut may not be enough to slow down the price decline, saying Brent prices would fall back to $20 per barrel from $32 at the moment and $70 at the start of the year.
Trump had threatened Opec leader Saudi Arabia with oil tariffs and other measures if it did not fix the market’s oversupply problem, as low prices have impacted the US oil industry.
Meanwhile, three OPEC+ sources said that watchdog International Energy Agency (IEA), would announce purchases into stocks by its members, with an estimate of 3 million bpd expected in the next couple of months.
The IEA said it would provide an update on Wednesday when it releases its monthly report. The United States, India, Japan and South Korea have said they could buy oil to replenish reserves.