Oil prices stable after OPEC and allies agree to historic production cut

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Oil prices fell in night trade after OPEC and its allies agreed to cut production by 9.7 million barrels a day. The deal, which was finalized on Sunday after discussions over the four-day marathon, is the biggest drop in production in history.

US crude West Texas Intermediate fell 2.5% to trade at $ 22.25 a barrel, while international benchmark crude Brent traded 10 cents higher at $ 31.58. In the first volatile trading minutes, the WTI jumped 8% before wiping out those gains to turn negative.

The group, known as OPEC +, originally proposed to cut production by 10 million barrels a day – which represents about 10% of the world’s oil supply – on Thursday, but Mexico objected to the amount he had been asked to reduce, suspending the final agreement. Under the new agreement, Mexico will reduce 100,000 barrels per day, instead of its initial allocation of 400,000 barrels per day.

The cut of 9.7 million barrels per day will begin on May 1 and continue until the end of June. The reductions will then decrease to eight million barrels per day from July to the end of 2020, and to six million barrels per day from January 2021 to April 2022.

“Unprecedented action for unprecedented times,” wrote Ed Morse, global director of commodities for Citi, on Sunday. Morse said the reduction will have a significant impact in the second half of the year and will help bring prices to the mid-$ 40 mark by the end of the year, but that there will be short-term pain while the market will rebalance.

“It is simply too late to prevent the build-up of very large stocks of more than a billion barrels between mid-March and the end of May and to prevent spot prices from falling to a single figure,” he said. he declares.

WTI crude oil fell more than 9% on Thursday, as traders feared the drop would not be large enough to offset the drop in demand caused by the coronavirus pandemic. For the year, WTI was down 62%, while Brent lost 52%. The market was closed on Friday.

“This is at least temporary relief for the energy industry and the global economy,” Per Magnus Nysveen, chief analyst at Rystad Energy, told CNBC in an email. “Even if the production cuts are less than the market needs and only postpone the problem of inventory constraints, the worst is yet to be avoided. “

President Donald Trump, who was heavily involved in negotiating an agreement between Saudi Arabia and Russia after the outbreak of a price war between the two countries, applauded the agreement by declaring in a tweet that it was “a good deal for all”. “This will save hundreds of thousands of energy jobs in the United States,” he added.

“The drop in production may help somewhat, but the market situation remains unfavorable to producers, especially in the short term,” added John Kilduff of Again Capital. “Prices are likely to fall as the global crude oil order backlog increases. A new level test of $ 20.00 is likely in the coming weeks. “

OPEC + hopes that countries outside the group, including the United States, Canada and Norway, will also cut production in order to support prices. Trump said market forces would naturally limit production.

Energy Secretary Dan Brouillette reiterated this point on Friday, saying that around two million barrels per day of US production would have been taken offline by the end of the year, with numbers reaching three million.

“Today’s crisis transcends the interests of any nation and requires a swift and decisive response from all of us. Failure to act has far-reaching consequences for each of our economies, “he said in a speech prepared for the G20 meeting on Friday. “Now is the time for all nations to seriously consider what each can do to correct the supply / demand imbalance,” he added.

– Michael Bloom of CNBC contributed to the report.

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