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OPEC deal: response and reaction
oPeC
FOllOWING the historic deal to cut global petroleum output by nearly 10%, or 9.7mn bar- rels per day, to tackle the impact of the corona- virus (COVID-19) pandemic on oil demand, prices rose about 1% to around $32 a barrel in london after swinging wildly in the first few minutes of trading following the deal. The focus now shifts to whether the cut will be enough to dent the massive glut that keeps growing as the virus shuts down the global economy.
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 on to 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 before dropping more than 1% in a rapid reversal. By 8:13 a.m. in london they were up 0.8% again at $31.72 a barrel.
With the virus paralysing air and ground travel, demand for gasoline, jet-fuel and diesel is collapsing. That has threatened the future of the US shale industry, the stability of oil-depend- ent states and squeezed the flow of petrodollars through an ailing global economy.
The US, Brazil and Canada will contribute another 3.7mn bpd on paper as their produc- tion declines, and other G20 states will contrib- ute 1.3mn bpd. Still, the G20 numbers do not represent real voluntary cuts, but rather reflect the impact that low prices have already had on output, and would take months, perhaps more than a year, to come into effect.
“OPEC+ started the fire, and it was their responsibility to put it out,” Jason Kenney, the premier of Alberta, Canada’s biggest oil-produc- ing province, said in a Twitter post. “Many chal- lenging months ahead with very low demand and huge inventories, but at least now there is path to recovery.”
After its diplomatic victory to cut only 100,000 bpd Mexico’s future inside OPEC+ is uncertain, as it is 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, Presi- dent Trump,” said Jason Bordoff, a former White House official during the Obama administration and now at Columbia University.
Trump became the first US 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 almost 10mn bpd cut will be tapered to 7.6mn bpd until the end of the year, and then to 5.6 mn bpd through 2021 until April 2022.
The deal does not take effect until May 1, leav- ing OPEC+ countries, which have significantly increased production over the last month, able to continue flooding the market for nearly another three weeks.
Goldman Sachs Group called the cuts “too little and too late,” saying they would only lead to an actual reduction of about 4.3mn bpd from first-quarter levels. “Ultimately, this simply reflects that no voluntary cuts could be large enough to offset the 19mn bpd average April- May demand loss due to the coronavirus,” the bank’s analysts wrote in a report.
Under the terms, Saudi Arabia will cut its production just a fraction under 8.5mn bpd - its lowest level since 2011. The OPEC+ deal meas- ures the Saudi cut from a baseline of 11mn bpd, 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 12.3mn bpd as part of its war with Russia for market share.
“We want to regain the stability of the oil mar- ket,” Prince Abdulaziz said.
With countries around the world extend- ing their lockdowns, the death toll mounting in New York, and unemployment exploding in the US, the oil market is now far more wor- ried about consumption than supply. OPEC itself acknowledged the challenge, with its chief warning ministers that demand fundamentals were “horrifying.” In an internal presentation seen by Bloomberg News, OPEC told ministers it expected global oil demand to plunge 20mn bpd in April. ™
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Week 15 15•April•2020