Commentary

Deal Sealed To Lower Oil Output -- But Pump Prices Likely To Stay Low

Saudi Arabia and Russia reached an agreement yesterday with the world’s other oil-producing nations to slash output for two months in an effort to bolster prices battered by diminished demand due to the COVID-19 pandemic, even as the two countries had increased production in “a global game of chicken.” 

“OPEC+, a group that includes OPEC members as well as allied non-members like Russia and Mexico, finalized the deal on Sunday after days of marathon negotiations. 

“The agreement is massive, representing the largest slash to production in the history of OPEC. The cut is more than twice as large as the 4.2 million-barrel-per-day reduction the oil cartel made through a series of cuts during the 2008 financial crisis. But analysts say it will likely be dwarfed by the size of pandemic-driven demand loss,” writes  NPR’s Camila Domonoske.

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It “came after President Trump intervened to help resolve a Saudi-Mexico standoff that jeopardized the broader pact,” Benoit Faucon, Summer Said and Timothy Puko write  for The Wall Street Journal.

“As part of the agreement, 23 countries committed to withhold collectively 9.7 million barrels a day of oil from global markets. The deal, designed to address a mounting oil glut resulting from the pandemic’s erosion of demand, seeks to withhold a record amount of crude from markets -- over 13% of world production. The U.S. has never been so active in forging a pact like this,” they continue.

“This will save hundreds of thousands of energy jobs in the United States,” Trump tweeted at 3:40 p.m. ET.

“The group, which together is known as OPEC+, had been seeking to cut production in order to buoy oil prices, which fell to 18-year lows in recent weeks. The drop came after Saudi Arabia and Russia abandoned years of production cuts in early March, launching a price war by flooding the market with crude. The coronavirus, meanwhile, dealt a devastating blow to energy demand, pushing prices even lower,” write  Clare Duffy and Jill Disis for CNN Business.

“While historic, the deal is unlikely to solve the demand crisis. The agreed reduction in output amounts to only about 10% of the world's normal supply of oil, far below the estimates for how much demand for oil has collapsed amid the coronavirus pandemic,” they add.

“While the planned cut is slightly smaller than a tentative pact reached last Thursday, the deal should bring some relief to struggling economies in the Middle East and Africa and global oil companies, including American firms that directly and indirectly employ 10 million workers. Analysts expect oil prices, which soared above $100 a barrel only six years ago, to remain below $40 for the foreseeable future. The American oil benchmark price was just over $23 a barrel on Sunday night,” Clifford Krauss explains  for The New York Times.

“The planned cooperation agreement comes just weeks after Riyadh and Moscow vowed to pump record crude volumes, despite the economic slowdown triggered by COVID-19, in a bid to claim a bigger share of the market. The oil price plunged to 18-year lows of less than $28 a barrel as fears of a global economic recession and severe restrictions on road transport and aviation caused oil demand to fall by an average of 27 million barrels a day in April,” Jillian Ambrose recalls  for The Guardian.

“Oil prices were volatile in reaction to the deal” this morning, according to Financial Times. “Traders doubted the cuts would reach the headline figures or compensate for a collapse in demand expected to be at least twice the size of the OPEC supply reductions,” explain  Derek Brower, Anjli Raval and David Sheppard.

“Big consumer countries that backed the deal, including the U.S., China, Japan, India and South Korea, are also understood to be preparing to buy oil to boost their reserves and tighten the market,” they add.

“‘Unprecedented measures for unprecedented times,' Ed Morse, Citi’s global head of commodities, wrote in a note to clients on Sunday. Morse said the cut will have a significant impact in the second half of the year and help lift prices to the mid-$40s by year-end, but that there will be short-term pain while the market rebalances,” CNBC’s Pippa Stevens reports  for NBC News.

“It’s simply too late to prevent a super-large inventory build of over one billion barrels between mid-March and late May and to stop prices from falling into single digits,” Stevens said.

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