Diplomacy in support of the global economy: OPEC+ deal, supported by the G20
Leading economies swung behind a historic move by Opec and allied producers to slash world crude supply by at least 10 per cent in an effort to prop up oil prices and tame a glut caused by the coronavirus pandemic.The deal initially agreed in the early hours of Friday morning aims to end a month-long price war launched by Russia and Saudi Arabia that helped drive oil prices to their lowest levels in 18 years and threatened to wreak havoc on the energy industry.Friday’s videoconference of G20 energy ministers marked an ambitious effort at oil-market collaboration to stabilise an industry brought to the brink by the loss of more than 30 per cent of global oil demand. But will it be enough to shore up a vital sector of the world economy?
The G20 meeting followed a deal between the Opec+ group — made up of Opec members and allies such as Russia — to cut a record 10m barrels a day of production during May and June. Saudi Arabia, the largest Opec producer, and Russia will together share half of that total. Other Opec+ producers agreed to remove an additional 5m b/d. Opec+ in a statement also called on other countries to “contribute to the efforts aimed at stabilising [the] market” — a reference to the US, Canada and others. At 10m b/d, the cuts are by far the deepest ever made by Opec or its partners. With G20 support in the form of oil purchases for storage and declining production in North America, it could mean millions more barrels removed from the market. US president Donald Trump even offered to help overcome a last-minute hurdle for the deal, as Mexico was not willing to cut as deeply as other members of the group. On Friday he said the US would “help Mexico along” with their share of cuts, though he did not specify how. On the assumption that market conditions will eventually normalise, the cuts will gradually weaken over the next two years.
The initial market reaction was one of relief that the Saudi-Russia price war was over. But this was quickly followed by concern that even the largest oil cuts deal in history might not be enough. Global benchmark Brent finished lower on the day at $31.48 a barrel as the market closed for the Easter weekend.With global consumption of 100m b/d estimated to be down about a third, a 10m barrel cut, even if other producers outside Opec add to it, will struggle to significantly boost prices.“Opec+ joining forces with the G20 is a historic show of co-operation but boils down to low prices plus a few countries, most notably Saudi Arabia, delivering cuts that still won’t be enough to deal with the scale of this demand collapse,” said Jason Bordoff, head of Columbia University’s Center on Global Energy Policy.Longer term, the end of the price war that broke out last month between the world’s two largest oil exporters could lead to greater market stability. But Saudi Arabia’s relationship with Russia may still be tarnished, with only the extent of the crisis rekindling their alliance for now.
The US president pressured Saudi Arabia and Russia to end their fight and make deep cuts to output. But the US and other G20 producers did not attend the meeting to volunteer cuts of their own but rather to report how much their output was already dropping due to the price collapse. Dan Brouillette, US energy secretary, said his country’s production was likely to fall by around 2m b/d, adding it was time for “all nations to seriously examine what each can do to correct the supply/demand imbalance”. For some G20 oil-consumer countries, that will mean buying up cheap oil for strategic oil reserves — emergency stockpiles — to help boost demand.The involvement of other G20 energy ministers gave a sheen of global endorsement to a move that is, in effect, designed to raise oil prices during a global economic crisis. The UK’s Kwasi Kwarteng attended the videoconference, alongside counterparts from France, Germany, Japan and others.Fatih Birol, head of the International Energy Agency, warned that the “extreme volatility we are seeing in oil markets is detrimental to the global economy at a time when we can least afford it”.
What does it mean for the oil sector?The Opec+ deal and any international backing will shift trader sentiment from perceptions of a market in freefall to one with a new floor. Opec+ said it would still be cutting up to 6m b/d two years from now — another feature of the deal that will shift perceptions. But a price rescue this is not.This deal does not fix the global demand collapse. Prices are likely to stay below the $40-$50 a barrel needed by many non-Opec producers to break even.Weak oil-producing economies, from Iraq to Nigeria, face a bleak outlook as budgets shrink just when funds are needed to combat coronavirus. Production will still fall, especially in high-cost US and Canadian fields.Scott Sheffield, head of US shale producer Pioneer Natural Resources, said US output could still drop by 3m b/d while consultancy Rystad Energy said Canadian production would fall 1.1m b/d in the coming months. Anas Alhajji, an adviser to oil companies and producer countries, said: “The cut will eliminate the political pressure on Russia and Saudi Arabia, but won’t be enough to counter the coronavirus impact on demand or prevent shut-ins in shale.
Mr Trump predicted 10m b/d of cuts last week and was in touch several times in recent days with President Vladimir Putin of Russia and King Salman of Saudi Arabia to make sure they delivered. He said the market may “be hitting bottom”. The deal should satisfy each side of a divided US oil industry. Before the meeting, shale companies lobbied the president to impose sanctions on Russian and Saudi crude. But ExxonMobil and Chevron, among other big US oil companies, had lobbied to let free markets rule, whatever the price impact. The Opec-Russia deal makes no demands on North American producers to cut more than they will be forced to under price pressure anyway. This was a diplomatic victory for Mr Trump, who had urged Saudi Arabia and Russia to end their price war without conditions.
