OPEC members and their allies, including Russia and Mexico, announced Sunday that they have agreed to cut production by 9.7 million barrels a day in May and June – among the deepest cuts ever granted by world oil producers. After that, the group will gradually increase its production until the reductions end in April 2022.
The group, which is known as OPEC +, has been looking to cut production to support oil prices, which have dropped to 18-year lows in recent weeks. The decline came after Saudi Arabia and Russia abandoned years of production cuts in early March, sparking a price war by flooding the crude market. The coronavirus, on the other hand, has dealt a devastating blow to energy demand, pushing prices even lower.
Sunday’s announcement comes after OPEC + tried to reach an agreement on Thursday to cut 10 million barrels a day, but Mexico has not signed the deal.
On Friday, however, Mexican President Andrés Manuel López Obrador said his country would cut production by 100,000 barrels a day. Although this amount is much lower than what was proposed at the meeting on Thursday, López Obrador added that US President Donald Trump had proposed to reduce American production by 250,000 barrels per day to compensate Mexico. The United States is not a member of OPEC +.
“It is a small sum for us, a large sum for Mexico,” he said.
“This will save hundreds of thousands of energy jobs in the United States,” said Trump in the tweet.
Oil futures were first cut after the deal was announced, although they advanced during trading hours in Asia. Brent, the world benchmark, registered a last increase of more than 4% to $ 32.78 per barrel. US oil prices rose almost 5% to $ 23.85 a barrel.
Despite this, the drop in production accounts for only about 10% of the world’s normal oil supply, well below estimates of the amount of oil demand that collapsed amid the coronavirus pandemic.
Goldman Sachs analysts called the deal “historic but insufficient,” adding that the voluntary reductions were “still too little and too late to avoid breaking storage capacity.”
“In the end, this simply reflects that no voluntary reduction could be large enough” to compensate for the loss of demand, which they set at an average of 19 million barrels per day in April and May.
Jeffrey Halley, senior market analyst for the Asia-Pacific region in Oanda, called the deal “disappointing” and noted that non-OPEC + oil producers, including the United States, Canada and Norway , did not commit on paper to “real reductions in production”.
“The OPEC + agreement, while well intentioned, fails wholeheartedly to address the supply and demand base facing the world,” added Halley. “At best it can only put a floor below oil prices at their March lows.”
– Chris Liakos, John Defterios and Chris Isidore from CNN contributed to this report.