Photo: Prince Abdul Aziz Bin Salman, Saudi Arabia’s Minister of Energy; Source: OPEC

Historic OPEC+ deal to slash output ends oil price war

After four days of negotiations OPEC, Russia, and allies have agreed on record production cuts to save the oil industry amid a major industry crisis exacerbated by the coronavirus pandemic.

The 10th (Extraordinary) OPEC and non-OPEC Ministerial Meeting was held via videoconference, on Sunday, 12 April 2020, under the Chairmanship of Prince Abdul Aziz Bin Salman, Saudi Arabia’s Minister of Energy, and co-Chair Alexander Novak, Minister of Energy of the Russian Federation.

The producers on Sunday agreed to collectively cut 9.7 million barrels of crude oil per day for two months starting 1 May 2020, thereby ending the oil price war, which started last March.

For the subsequent period of six months, from 1 July 2020 to 31 December 2020, the total adjustment agreed will be 7.7 mb/d.

This will be followed by a 5.8 mb/d adjustment for a period of 16 months, from 1 January 2021 to 30 April 2022.

The baseline for the calculation of the adjustments is the oil production of October 2018, except for Saudi Arabia and Russia, both with the same baseline level of 11.0 mb/d. The agreement will be valid until 30 April 2022, however, the extension of this agreement will be reviewed during December 2021.

The participating countries will meet again on 10 June 2020 via videoconference, to determine further actions, as needed to balance the market.

Initially announced last Thursday, the deal was hampered by Mexico’s refusal to take part in cuts at the same level as others. Instead of the requested 400,000 barrels per day, Mexico insisted it was only able to reduce its output by 100,000 barrels per day due to financial difficulties within its national oil company Pemex.

The original OPEC+ deal would have seen a cut of 10 million barrels of crude per day from an October 2018 baseline, for an initial two-month period. With OPEC+ letting Mexico off the hook, the official OPEC+ cut now stands at 9.7 million barrels, as Mexico agrees to cut 100,000 barrels per day instead of 400,000 barrels per day.

In reality, however, the OPEC+ deal will cut more than the quoted 9.7 million barrels, since current production levels are much higher than the October 2018 baselines used to calculate the production cuts.

The deal sees Russia and Saudi Arabia absorbing the brunt of the cuts, each agreeing to cut their production down to 8.5 million barrels per day. Saudi Arabia’s production stood at 12.3 million barrels per day, and Russia was producing 11.29 million barrels of oil per day in March. Both countries, however, used 11 million barrels per day as their baseline in the deal.

G20 nations

In a meeting on Friday, the G20 nations also agreed to take action to stabilize the market. The United States, for example, is set to use the Strategic Petroleum Reserve to store vast quantities of oil.

The OPEC+ group is expected to request the G20 to cut over 3 million barrels per day of production. The G20 energy ministers agreed Friday to create a task force to monitor the situation and formulate strategies. The Texas Railroad Commission, the agency that regulates the state’s oil and gas industry, is also scheduled to meet on Tuesday to discuss regulating formal cuts, though the U.S. has largely maintained that the free market will determine oil production cuts.

The U.S. President Donald Trump on Sunday tweeted his support for the OPEC+ deal and congratulated Russia and Saudi Arabia leaders.