- OPEC and its allies agree on 9.7 million barrels/day cut to boost prices
- Oil prices have fallen as much as 63% in 2020
- More cuts will be discussed at next OPEC meeting this June
Twenty-three oil producing countries in the group known as OPEC+ have agreed to a 9.7 million barrels per day cut, starting on May 1, 2020, for an initial period of two months. This is the single largest output cut in history. This amount will taper to 7.7 million b/d for the remaining six months of the year and to 5.8 million b/d for 16 months after that. The next meeting will be held on June 10, 2020 to discuss further actions that may be needed to balance the market.
This historic deal marks the end of the price war that upended energy markets and exacerbated the impact of the coronavirus outbreak. Oil prices have fallen 40% since early March when Russia and Saudi Arabia broke a three-year alliance that propped them up and hit an 18-year-low on March 30. Energy stocks jumped in pre-market trading with Devon Energy, Schlumberger NV, Phillips 66 and Marathon Petroleum all up around 3%. Oil prices, however, fell after initially rising on the news.
"The big Oil Deal with OPEC Plus is done. This will save hundreds of thousands of energy jobs in the United States. I would like to thank and congratulate President Putin of Russia and King Salman of Saudi Arabia. I just spoke to them from the Oval Office. Great deal for all!" tweeted President Trump who reportedly had a role to play in resolving a last minute standoff between Mexico and Saudi Arabia.
The production cut may still not be enough to stop the wave of oil and gas bankruptcies expected over the next year. According to a Federal Reserve Bank of Dallas survey conducted March 11-19, firms need WTI price of $49 per barrel on average to profitably drill a new well. At $40 per barrel, 15% expect to remain solvent for less than one year and 24% expect one to two years.
Despite the cut representing around 10% of global production, Goldman's global head of commodities Jeff Currie pointed out it will be insufficient to offset the 26 million b/d fall in demand due to COVID-19. Once things return to normal, the brokerage predicts demand recovery will be V-shaped but supply recovery will be L-shaped because of production shut ins. It says Brent crude will fall to $20 a barrel in the near term and start to rebalance into 2021 with a price target of $55/b next year.