The oil producing cartel Opec, Russia and even the United States have joined hands to announce a record cut in output of oil and supply to the global market in order to prop up prices in the international market even as demand gas been significantly reduced because of the novel coronavirus pandemic. This unprecedented deal is expected to reduce global supply of oil by as much as 20 per cent in the short term.
The pandemic enforced travel restrictions have caused a slump in oil demand globally driving down prices that has in turn impacted the income of oil export dependent countries. The shale industry of the US has been battered because of the higher costs of production and hence highly vulnerable in low price environment.
Output has been agreed to be reduced 9.7 million barrels per day (bpd) for May and June, announced the oil producing groups known as OPEC+. This decision was taken after the parties discussed the issue for over four days after pressure on the oil producers from US President Donald Trump to prevent the further slide of global oil prices.
Effective May 1, it is expected that the total global oil output cuts will amount to more than 20 million bpd, or about 20 per cent of the total global supply of oil, according to reports quoting sources from the OPEC+. The same figure was initially quoted in its draft statement by Opec but was later removed in the final version of the statement.
Compared to the previous record for oil production cut in 2008, the latest cuts will be four times greater. Curbs will be gradually relaxed after June even though cuts in production are expected to still remain in place till April next year.
The commitment by Saudi Arabia and Russia was welcomed by trump through a statement from the White House in which he congratulated both the countries “to return oil production to levels consistent with global energy and financial market stability.”
“The big Oil Deal with OPEC+ is done. This will save hundreds of thousands of energy jobs in the United States,” Trump wrote earlier on Twitter.
“I just spoke to them… Great deal for all,” added Trump while thanking Russian President Vladimir Putin and Saudi King Salman for pushing the deal through,
Since the spread of the coronavirus pandemic, there has been a one third drop in oil demand.
Strategic stocks purchases by the largest consumers of oil of the world, deeper voluntary production cuts by some OPEC+ members and contributions from non-members will be included in the total global cuts in oil production.
Since Saudi Arabia, the United Arab Emirates and Kuwait would cut supplies much deeper given higher output in April, therefore the real effective cuts by OPEC+ would total 12.5 million bpd, said Saudi Energy Minister Prince Abdulaziz bin Salman.
Production cuts of between 4 million and 5 million bpd will be contributed by non-OPEC+ members including Brazil, Canada, Indonesia, Norway and the United States, said reports quoting sources.
Within the next couple of months purchases into stocks by its members to the tune of 3 million bpd will be announced by the International Energy Agency (IEA), the energy watchdog for the world’s most industrialised nations, said reports quoting the OPEC+ sources.
An update on the issue will be provided by the IEA on Wednesday, the agency said. Procurement of oil to replenish reserves will be done by the United States, India, Japan and South Korea, he countries have said.
(Adapted from Reuters.com)