OPEC and allies led by Russia agreed on Sunday to cut oil output by a record amount representing around 10% of global supply – to support oil prices amid the coronavirus pandemic, and sources said effective cuts could amount to as much as 20%.
Measures to slow the spread of the coronavirus have destroyed demand for fuel and driven down oil prices, straining budgets of oil producers and hammering the U.S. shale industry, which is more vulnerable to low prices due to its higher costs.
The group, known as OPEC+, said it had agreed to reduce output by 9.7 million barrels per day (bpd) for May-June, after four days of marathon talks and following pressure from U.S. President Donald Trump to arrest the price decline.
In the biggest oil output cut ever, exceeding four times the cuts approves during the 2008 financial crisis, the countries will keep gradually decreasing curbs on production in place for two years until April 2022.
“The big Oil Deal with OPEC+ is done. This will save hundreds of thousands of energy jobs in the United States,” Trump wrote on Twitter, thanking Russian President Vladimir Putin and Saudi King Salman for pushing the deal through.
“I just spoke to them… Great deal for all,” Trump said.
OPEC+ has said it wanted producers outside the group, such as the United States, Canada, Brazil and Norway, to cut a further 5% or 5 million bpd.
Three OPEC+ sources said effective oil output cuts could be close to 20 million bpd if contributions from non-members, steeper voluntary cuts by some OPEC+ members and strategic stocks purchases were taken into account.
Gulf members of the Organization of the Petroleum Exporting Countries would be cutting output more steeply than agreed, OPEC+ sources said.
The sources said the International Energy Agency (IEA) would announce purchases into stocks by its members on Monday. The IEA did not immediately respond to a request for comment.
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 put the U.S. oil industry, the world’s largest, in severe distress.
Canada and Norway had signaled willingness to cut and the United States, where legislation makes it hard to act in tandem with cartels such as OPEC, said its output would fall steeply by itself this year due to low prices.
The OPEC+ deal had been delayed since Thursday, however, after Mexico, worried about derailing its plans to revive heavily indebted state oil company Pemex, balked at the production cuts it was asked to make.
Mexican President Andres Manuel Lopez Obrador said on Friday that Trump had offered to make extra U.S. cuts on his behalf, an unusual offer by a Trump who has long railed against 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.
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 outbreak.
An 10-15% cut in supply might not be enough to arrest the price decline, banks Goldman Sachs and UBS predicted last week, saying Brent prices would fall back to $20 per barrel from $32 at the moment and $70 at the start of the year.
© Thomson Reuters 2020.