Representatives of oil-producing countries have reached a tentative agreement on limiting production, nudging upward the price of crude that plummeted after a Saudi push to flood the market that coincided with Covid-19 lockdowns.
OPEC+ announced the decision to scale back output by 10 million barrels per day starting on the first day of May, after an hours-long teleconference on Thursday, Reuters reported, citing an OPEC statement. The cuts will slowly reduce over time, easing to 8 million bpd after two months until the end of 2020, and relaxing further in the months afterward.
Thursday’s meeting was called after enormous US pressure on Saudi Arabia to halt the price war with Russia that Riyadh initiated in early March – just before global demand crashed due to half the world going into lockdown over the coronavirus pandemic. Saudi Arabia ramped up oil production drastically, driving the price of crude to as low as $20 a barrel this week.
While this has hurt both Saudi Arabia and Russia – both of which rely on oil revenues to fill their budgets, albeit to a different extent – it has been absolutely devastating for the US shale industry, which relied on a favorable arbitrage between Brent crude and WTI prices to become a major exporter in recent years.
Earlier on Thursday, oil prices jumped by over 12 percent on the promise of a deal, with Brent crude futures trading at almost $34 a barrel and WTI crude reaching $26.23. The growth was short-lived, however, with oil prices plummeting by some 10 percent later in the day, as the negotiations dragged on.
US producers need a price of at least $40 a barrel to stay competitive. Russian President Vladimir Putin said Moscow would be comfortable with $42 a barrel going forward. Energy experts estimate the Saudis would need a price of $70-80 a barrel to fully fund their entitlement programs.
US Energy Secretary Dan Brouillette said that OPEC+ could “easily” cut production by 10 million barrels per day, and even more if other countries like Canada and Brazil did the same. He did not commit the US to any deal, but said that the downturn in demand due to Covid-19 lockdowns has already led to cuts of “about 2 million barrels per day through the remainder of 2020.”
As details of the production cut started to emerge, US President Donald Trump held a conference call with Russian President Vladimir Putin and Saudi King Salman bin Abdulaziz to discuss the agreement, according to White House aid Dan Scavino.
Before the tentative deal was reported, there were mounting concerns that the marathon talks could have ended without a breakthrough, however, with some reports suggesting Mexico nearly derailed the deal, threatening to withdraw from negotiations over the proposed output cuts. Mexico’s state-owned oil company, Pemex, has long chafed against any reductions, insisting on moving ahead with plans to ramp up output instead. The firm intends to double its number of newly drilled wells in 2020, according to Bloomberg, and has plans to fast track the development of 15 new sites.