Oil Prices Surge as OPEC and Allies Agree to Cut Oil Production amidst Slowing Demand

UTC by Bhushan Akolkar · 3 min read
Photo: Depositphotos
Photo: Depositphotos

Ultimately, the OPEC+ nations have reached an agreement to cut down oil production and stabilize the falling crude prices. The coronavirus pandemic has given a major blow to the oil markets with global consumption falling drastically in the last two months.

In a historic turn of events, the two oil giants Saudi Arabia and Russia have ultimately ended their oil war on Sunday, April 12. The two oil-rich countries have agreed on the biggest oil production cut in the history of oil markets. As a result, both countries will work together on cutting the global oil output by 9.7 million barrels per day.

This is equivalent to cutting 10 percent of the global oil supply for the months of May and June. Reports also suggest that U.S. President Donald Trump has been actively involved in these discussions to stabilize the oil markets that have been severely impacted by the coronavirus pandemic. President Trump said that it was “a great deal for all” adding that it will save several energy jobs in the U.S.

Sunday’s agreement came following four consecutive meetings last week as oil prices started collapsing. But late evening on Sunday, the OEC+ alliance and the Group of 20 other nations finally reached an agreement. As per Bloomberg, U.S., Canada, and Brazil will collectively cut down 3.7 million barrels per day oil production. Similarly, the Group of 20 nations shall offer a cut down of 1.3 million barrels per day.

Soon after the announcement, oil prices in the international markets jumped 4%. The Brent crude price saw oil moving above $33 per barrel. Speaking to Bloomberg, Saudi Energy Minister Prince Abdulaziz bin Salman, said:

“We have demonstrated that OPEC+ is up and alive. I’m more than happy with the deal.”

Oil Production Cut: Temporary Relief or Game-Changing Decision?

The COVID-19 pandemic has given major blows to the global economy. With major countries announcing lockdown, businesses have come to standstill and so has the crude consumption reduced drastically. Besides, it’s very much uncertain when we will be out of the COVID situation.

Some analysts have predicted that if the situation persists, we can soon reach the peak of global oil reserves. Thus, the decision to cut down the oil production amidst weakening demand was a major relief to the market. In an email to CNBC, Rystad Energy’s head of analysis Per Magnus Nysveen said:

“This is at least a temporary relief for the energy industry and for the global economy. Even though the production cuts are smaller than what the market needed and only postpone the stock building constraints problem, the worst is for now avoided.”

But the real question is that will the oil production cuts transcend to a proper supply/demand balance going further? U.S. Energy Secretary Dan Brouillette said:

“Today’s crisis transcends the interests of any one nation and requires a swift and decisive response from us all. Failure to act has far reaching consequences to each of our economies. This is a time for all nations to seriously examine what each can do to correct the supply/demand imbalance.”

Consulting giant Goldman Sachs Group believes that the decision comes too late and that the damage is already done. Goldman said that Sunday’s agreement will ultimately result in an actual reduction of only 4.3 million barrels a day from Q1 2020 levels.

“Ultimately, this simply reflects that no voluntary cuts could be large enough to offset the 19 million barrels a day average April-May demand loss due to the coronavirus,” explained the company.

Commodities & Futures, Market News, News
Bhushan Akolkar
Author: Bhushan Akolkar

Bhushan is a FinTech enthusiast and holds a good flair in understanding financial markets. His interest in economics and finance draw his attention towards the new emerging Blockchain Technology and Cryptocurrency markets. He is continuously in a learning process and keeps himself motivated by sharing his acquired knowledge. In free time he reads thriller fictions novels and sometimes explore his culinary skills.

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