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Posted: 2020-04-13 01:00:01

Posted April 13, 2020 11:00:01

The world's biggest oil producers, including Russia, Saudi Arabia and the United States, have agreed to slash the world's oil supply by 10 per cent in a desperate bid to lift prices, which have been hammered by the coronavirus outbreak.

Key points:

  • A previous agreement by OPEC+ to cut production this year fell apart because of a dispute between Russia and Saudi Arabia
  • A 10 to 15 per cent cut in supply might not be enough to arrest the price decline, banks Goldman Sachs and UBS predicted last week
  • Donald Trump had threatened OPEC leader Saudi Arabia with oil tariffs and other measures if it did not fix the market's oversupply problem

Measures to slow the spread of COVID-19 have destroyed demand for fuel and driven down oil prices, straining budgets of oil producers and hammering the US shale industry, which is more vulnerable to low prices due to its higher costs.

The group, known as OPEC+, said it had agreed to reduce output by 9.7 million barrels per day (bpd) for May and June, after an emergency virtual meeting on Sunday.

It also comes after four days of high-level negotiations, and following pressure from US President Donald Trump to arrest the price decline.

The biggest oil cut ever is more than four times deeper than the previous record cut in 2008.

Producers will slowly relax curbs after June, although reductions in production will stay in place until April, 2022.

Not a big enough cut: analyst

A previous agreement by OPEC+ to cut production this year fell apart because of a dispute between Russia and Saudi Arabia.

This triggered a price war that brought a flood of oil supply just as demand for fuel was crushed by the coronavirus pandemic.

Global oil demand is estimated to have fallen by a third as more than 3 billion people are locked down in their homes due to the outbreak.

If the global economy stays closed for another few months, "this 9.7 million (bpd) reduction will be meaningless because people aren't driving," said Peter Cardillo, chief market economist at Spartan Capital Securities.

Meanwhile, a 10 to 15 per cent cut in supply might not be enough to arrest the price decline, banks Goldman Sachs and UBS predicted last week.

They predicted Brent prices would fall back to $US20 per barrel (from $US32 at the moment, and $US70 at the start of the year).

"For energy markets to get excited, production cuts around 20 million barrels per day were needed, not the 9.7 million bpd plus another 5 million bpd from G-20 countries," said Edward Moya, senior market analyst at OANDA.

"No one will be surprised if this OPEC event becomes a 'buy the rumour, sell the news' event.

"Despite the scepticism that this production deal will not see a high-level of compliance, it should end calls for oil prices to fall to single digits."

Oil industry in severe distress

Mr Trump had threatened OPEC leader Saudi Arabia with oil tariffs and other measures if it did not fix the market's oversupply problem as low prices have put the US oil industry, the world's largest, in severe distress.

Canada and Norway had signalled a willingness to cut, while the US said its output would fall steeply by itself this year because of low prices.

However, the OPEC+ deal had been delayed since Thursday after Mexico, worried about derailing its plans to revive heavily indebted state oil company Pemex, balked at the production cuts it was asked to make.

Under the new agreement, Mexico will cut 100,000 barrels per day, instead of its initial allocation of 400,000 barrels per day.

Mexican President Andres Manuel Lopez Obrador said on Friday that Mr Trump had offered to make extra US cuts on his behalf — an unusual offer by the US President, who has long railed against OPEC.

Mr Trump said Washington would help Mexico by picking up "some of the slack" and being reimbursed later — but did not explain how that would work.

ABC/Reuters

What you need to know about coronavirus:

Topics: oil-and-gas, industry, business-economics-and-finance, covid-19, diseases-and-disorders, health

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