Members of Organization of Petroleum Exporting Countries (OPEC) converged on Thursday to put an end to the oil production cut that has stalled for some months now due to the disagreement between de-facto leader Saudi Arabia and Russia.
The agreement was to temporarily cut oil production to 10 million barrels per a day, cutting about 23 percent of their production levels in May and June. The statement issued by the organization after the meeting said that the agreement will be reviewed and adjusted periodically.
“Adjust downwards their overall crude oil production by 10.0 mb/d, starting in May 2020, for an initial period of two months that concludes on 30 June 2020. For the subsequent period of 6 months, from 1 July 2020 to 31 December 2020, the total adjustment agreed will be 8.0 mb/d. It will be followed by a 6.0 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 the Kingdom of Saudi Arabia and the Russian Federation, both with the same baseline level of 11.0mb/d. The agreement will be valid until 30 April 2022, however, the extension of this agreement will be reviewed during December 2021,” part of the communiqué said.
Earlier in March, attempts by OPEC members to agree on production cut failed as Russia and Saudi Arabia disagreed on output quota. The disagreement sent oil prices spiraled downward to less than $20 per barrel.
The world economy appears to be hanging partly on the decision of the Alliance as U.S. stocks keep plunging partly due to the low prices of oil following the outbreak of coronavirus pandemic.
The need to stabilize the oil price became urgent as the pandemic continues to wreak havoc around the world, plummeting economies and calling for strong sustainability measures to save jobs and businesses.
For this need, the U.S. President Donald Trump stepped in. Trump said he spoke to Saudi king Salman and Russian President Vladimir Putin and urged them to go back to the negotiation table. He said on Thursday that the oil production cut deal is in the interest of oil producing countries including the U.S. and he believes the cartel would reach a deal soon to curtail the looming crisis of layoffs all over the world.
“The numbers are so low that there will be layoffs all over the world. There will be certainly layoffs in this country, and we don’t want that to happen,” Trump said in a press briefing on Thursday, in reference to oil prices.
Russia and Saudi Arabia had to put their differences apart to reach a deal in one of the most challenging times in the history of the oil market. OPEC Secretary General Mohammed Barkindo described the current situation of the oil industry as “hemorrhaging” and called for urgent action to stem it.
“Our industry is hemorrhaging; no one has been able to stem the bleeding.
“Every producer, many of whom are developing nations, have been impacted and no one is immune. It is forcing us to access and reassess what the consequences are on an almost daily basis,” Barkindo said.
OPEC members are desperately trying to salvage a seemingly hopeless situation slipping away from their grip. The deal is to cut production by 10 million barrels per day in May and June, which is the deepest cut ever agreed on by the cartel.
But not all members agreed, Mexico refused to support the agreement to cut its share of 400,000 barrels per day, leaving the deal in limbo. The Alliance’s statement said the deal needs Mexico’s consent to take effect and her refusal to accept the cut opened the way for another round of talk.
But on Friday, Mexican president Andres Manuel Lopez said he spoke to Trump on the issue and agreed to cut 100,000 barrels per day which left 300,000 more barrels to make the consensus a reality. But Trump said the U.S will cut its production by further 250,000 barrels to compensate for Mexico.
However, the deal appears unlikely to stabilize price as demand is down as much as 20 million barrels per day. Even if producers cut output by 10 million barrels per day it is unlikely to stem the massive fall in the oil market in recent time as a result of coronavirus.
Barkinda acknowledged the odds, he told attendees of the meeting held on Thursday that more cuts are needed to meet the shortfall in demand.
“Given the current unprecedented supply and demand imbalance, there could be a colossal excess volume of 14.7 million barrels a day in the second quarter of 2020,” he said.
The Thursday agreement means that output would be reduced to 8 million barrels per day from July to December and subsequently, 6 million barrels per day reduction from January 2021 to April 2022.
Iran, Libya and Venezuela would be exempted from the output cuts due to lost production or sanctions.
The challenge however lies on the possibility of OPEC accepting Trump’s compensation for Mexico, as the heavyweights in the OPEC+ group, especially Russia, have signaled that they would only accept the deal if members voluntarily make the production cuts.