Saudi Arabia and Russia ended their oil price war on Sunday by finalising a deal to make the biggest oil production cuts in history, following pressure from US President Donald Trump to support an energy sector ravaged by the coronavirus pandemic.
Opec said it would cut 9.7m barrels a day in oil production in May and June, equivalent to almost 10 per cent of global supply, and continue with lower reductions until April 2022, in an effort to stabilise global crude markets.
The cuts would be more than twice those made by the cartel during the global financial crisis.
Opec officials added that the cuts could end up being much greater, at around a fifth of global supply. However, this would include declines forced on producers outside the cartel by the recent oil price collapse, like those in the battered US shale sector.
Mr Trump welcomed the announcement, saying it would protect US jobs, and congratulated Saudi Arabia and Russia.
Oil prices were volatile in reaction to the deal, with the price of Brent crude, the international benchmark, gaining as much as 8 per cent while West Texas Intermediate, the US benchmark, jumped as much as 8.7 per cent. However, prices swung back on Monday with Brent trading 0.76 lower at $31.24 and WTI up 0.44 per cent at $22.88 a barrel.
Traders doubted the cuts would reach the headline figures or compensate for a collapse in demand expected to be at least twice the size of the Opec supply reductions.
Big consumer countries that backed the deal, including the US, China, Japan, India and South Korea, are also understood to be preparing to buy oil to boost their reserves and tighten the market.
The agreement by the Opec+ group, an alliance between the cartel and other producers including Russia, was first brokered on Thursday. It was backed by the US and G20 on Friday but had threatened to unravel after Mexico sought an exemption.
But under US pressure, Saudi Arabia allowed Mexico to cut by a smaller margin than its Opec+ peers. That resulted in the overall curbs from the group amounting to slightly less than the 10m b/d initially pledged.
Saudi Arabia, the United Arab Emirates and Kuwait, the cartel’s big Gulf producers, will deepen their own cuts, adding to the total, said officials.
Opec plans to include the declines by non-Opec producers may not be enough to reassure traders that have tried to weigh the loss of up to 30 per cent of global demand as economies have shut down to slow the spread of coronavirus.
Analysts said that cuts of less than 7m b/d might be delivered because high baselines had been used to calculate the cuts. The higher 20m b/d figure, including production declines caused by lower prices, was also greeted with scepticism.
“There is a large amount of double counting, creative accounting and obfuscation in reaching this 20m b/d figure,” said Amrita Sen at Energy Aspects.
The deal marks a pivot for Mr Trump, a frequent critic of Opec, who pushed the cartel to make cuts to support oil prices. The US president has previously blamed Opec for raising fuel prices for the average American consumer.
“The big Oil Deal with Opec Plus is done,” Mr Trump said on Twitter on Sunday. “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!”
Mr Trump had pressed Saudi Arabia’s Crown Prince Mohammed bin Salman and President Vladimir Putin of Russia over recent days to secure the deal — and even last week disclosed the size to be agreed. For Mr Putin, it has provided a likely boost to Russia’s economy and a new forum for ties to the US president.
“Under the watchful eye of Donald Trump, Saudi Arabia seemingly had to relax their position that everyone cuts by equal proportion,” said Helima Croft at RBC Capital Markets. “Trump essentially became the de facto Opec president.”
On Saturday, US senators from oil-producing states held heated calls with Saudi officials including Prince Abdulaziz bin Salman, the energy minister, and threatened to “re-evaluate” Washington’s relationship with the kingdom.
“Washington’s centrality to today’s deal closing may mark a de facto Opec+ expansion and a further step in a global shift towards managed markets,” said Kevin Book of Clearview Energy Partners.
G20 nations such as the US, Canada and Brazil supported the deal but were not required to make official commitments to cut.
But the countries will shed supply in any case, as weak oil prices force oil companies to reduce capital spending. US production could still fall by as much as a quarter, or 3m b/d, if the deal boosts oil prices to $35 a barrel, said Scott Sheffield, head of Pioneer Natural Resources, a large shale producer.
The Opec+ deal marks the latest in a series of efforts by governments and international institutions to support the global economy in the face of the Covid-19 crisis, which threatens to drive countries across the world into deep recession.
It is not yet clear whether the deal will be enough to support the oil market. Traders have said co-operation by producers removes the fear of a market in freefall but storage capacity could still become overwhelmed in the coming weeks, depending on how long lockdowns and other measures last.
Oil prices remain about half their price in January, but recovered from 18-year lows of about $20 after plans for deep cuts came to light two weeks ago.
Saudi Arabia is expected to raise its crude export prices on Monday after dramatically slashing them last month.
Additional reporting by Henry Foy in Moscow, Jude Webber in Mexico City and Daniel Shane in Hong Kong