The Organization of the Petroleum Exporting Countries and its allies, a group known as OPEC+, agreed on Thursday to cut oil output by 10 million barrels per day (bpd) in May and June, according to a statement released by the group. The move is designed to help prop up petrol prices, which have been battered by the coronavirus crisis.
OPEC+ said the cuts would be eased between July and December to eight million bpd, and the reductions would then be relaxed further to six million bpd between January 2021 to April 2022. OPEC+ said it would hold another video conference meeting on June 10 to assess the market. But it did not mention the conditions for countries outside the grouping to reduce oil output.
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“It’s a major climbdown for Russia and particularly Saudi Arabia, which picked a terrible time for a price war,” Jim Krane, energy fellow at Rice University, told Al Jazeera
Earlier on Thursday, the mega players were seeking to convince Mexico to join in a deal to implement record oil cuts to lift crudes prices battered by the coronavirus crisis, an OPEC source told Reuters news agency. OPEC+ ministers were trying to persuade Mexico to cut its output by 400,000 bpd based on the country’s output level in October 2018, as part of broader cuts.
A worldwide lockdown to slow the spread of the coronavirus pandemic has cut fuel demand by roughly 30 percent and contributed to a crash in prices that took major benchmarks down by more than two-thirds before they recovered in recent days in anticipation of action from oil producers.
“With storage brimming, it’s been clear that someone was going to have to fall on his sword. Now it looks like Saudi Arabia and Russia are again the adults in the room. Oil producers worldwide should be thankful,” Krane said.
Even with such a reduction in output, analysts still expect storage to fill up worldwide, forcing producers to cut back drilling activities. United States gasoline demand has fallen by nearly half since mid-March alone, and other nations have reported similar declines.
“The proposed 10 million bpd cut by OPEC+ for May and June will keep the world from physically testing the limits of storage capacity and save prices from falling into a deep abyss, but it will still not restore the desired market balance,” the oil markets team at Rystad Energy wrote in a research note.
The US, whose output has surged to the number-one spot, topping the Russians and the Saudis, has not committed to any cuts. But Washington has said that US output has fallen as oil prices take a dive and that it expects US output to fall by nearly two million bpd by next year.
“The core reason for the price war remains US shale’s freeriding on OPEC sacrifices. Once the pandemic eases, if we see shale returning to its old ways – grabbing market share while others cut – the Saudis will have cause to launch another price war,” Krane added.
The last OPEC meeting in early March ended acrimoniously, with Russia and Saudi Arabia unable to come to an agreement to curb output as the virus spread, adding to the slump in prices.