Too little, too late?
On Thursday, the Organization of Petroleum Exporting Countries (OPEC) and the Russia led non-OPEC oil producers, commonly termed OPEC+, took an unprecedented step to agree to cut the global crude oil output by 10 million barrels a day (bpd).
The next day, after a five-hour-long virtual meeting, G20 energy leaders endorsed the agreement, pledging to do “whatever it takes” to stabilize oil markets.
Russia has reportedly agreed to slash output by two million bpd. Saudi Arabia has agreed to shave four million bpd off its record-setting April production levels of 12.3 million bpd. That’s a cap of 8.3 million bpd, with both expected to bring down their respective production to around 8.5 million bpd.
The deal was only possible because U.S. President Donald Trump reportedly exerted intense pressure on Russia and Saudi Arabia. He held talks with Saudi Arabia’s king and crown prince, reportedly threatening them with sanctions if they failed to reach an agreement on output. Trump also reportedly spoke to President Vladimir Putin, underlining that tariffs could be imposed on Russian oil sales if no deal was reached.
Then, during the OPEC+ meeting, group member Mexico pushed back at the proposal to reduce its output by 400,000 bpd, offering to cut its production by 100,000 bpd instead.
This put the entire deal in jeopardy. In its official release, OPEC made it clear the deal was “conditional on the consent of Mexico.”
Trump apparently had to intervene again. He reportedly called Mexican President Andres Manuel Lopez Obrador, who then said they reached an understanding that the U.S. would cut its output by another 250,000 bpd, to compensate for the lack of Mexican compliance.
What about the contribution of other players?
Trump has insisted that the market would naturally force U.S. production down, effectively cutting OPEC rates as a matter of course. But the statement from the Mexican president that the U.S. would take up the remaining share of the output cut imposed on his country indicated that the U.S. would also be formally part of the deal.
U.S. Secretary of Energy Dan Brouillette said the U.S. was already on track for a production decline of two million to three million bpd. Further, he underlined that “the United States is taking action to open strategic petroleum reserves to store as much oil as possible. This will take surplus oil off the market at a time when commercial storage is filling up and the market is oversupplied.”
Prime Minister Justin Trudeau didn’t say specifically that Canada has committed to cuts.
However, sources indicate Norwegian new petroleum and energy minister would “consider a unilateral cut” if that supported its resource management and economy.
But even if producing countries fulfil their commitments to cut output, would that be enough to stem the crude oil oversupply and the resulting impact on prices?
It seems not.
The week before, International Energy Agency executive director Fatih Birol said that even if OPEC+ and other major oil producers agreed to deep production cuts, they would be unable to prevent what’s sure to be an enormous global inventory built due to recently unprecedented demand destruction.
Global oil consumption is down by at least 25 per cent, say observers, and could have gone beyond 30 per cent without intervention. That’s equivalent to 30 million bpd – and that’s huge.
So what impact could an optimal output cut of 10 million to 15 million bpd make? Particularly when the COVID-19 pandemic could permanently alter lifestyles, as some observers insist?
If that happens, global crude oil consumption would take a hit on a permanent basis.
The crude outlook continues to be bleak, despite the unprecedented production cuts.
Toronto-based Rashid Husain Syed is a respected energy and political analyst. The Middle East is his area of focus. As well as writing for major local and global newspapers, Rashid is also a regular speaker at major international conferences. He has been asked to provide his perspective on global energy issues by both the Department of Energy in Washington and the International Energy Agency in Paris.