The agreement to cut global crude oil output, reached amid high drama over the Easter weekend, appears effectively to be in two parts. A short-term agreement that’s probably not enough, and a longer-term plan that has a much better chance of success.
The Organization of the Petroleum Exporting Countries (OPEC) and its Russia-led allies agreed to cut output by a record 9.7 million barrels per day (bpd), after three days of intense diplomacy that had everything from a Mexican standoff to phone calls from U.S. President Donald Trump.
While there is little doubt the deal is significant, it’s worth noting it was reached in response to a global economic crisis unprecedented in its scale and in the speed at which it has hit the world economy.
Various members of OPEC and its allies in the group known as OPEC+ have been touting that the effective cut to output will be much more than 9.7 million bpd, with Kuwait’s oil minister saying it could be as high as 20 million bpd.
This works on the assumption that producers outside the group, such as the United States, Canada, Brazil and Norway will make voluntary cuts or be forced to shut-in some production because of the collapse in prices since January, when the new coronavirus broke out of its origin in China and started spreading across the globe.
This may be somewhat optimistic because if the output deal has the desired effect of stabilising and even increasing prices, the incentive for the other producers, who operate largely in free-market economies, to trim output is lessened.
Another leg of the 20 million-bpd assumption is that those countries – such as China, India and the United States – that can add to strategic and commercial storage will do so.
With China this is probably a safe bet, but it’s not so certain with other nations, given the massive strain the coronavirus is putting on the finances of governments and private companies. Even if there is the recognition that crude at current prices is a great deal, there may not be enough cash to purchase extra barrels for storage.
The main point, though, is that even if the optimistic view of a total cut of 20 million bpd comes to fruition, it’s still not enough to offset the demand shock from the coronavirus.