Global oil prices reversed earlier losses Sunday, rising more than 5% after OPEC leaders, as well as non-member allies, finally reached a conclusive agreement that will cut production by around 10 million barrels a day.
The deal, which begins on May 1 and lasts for two years, could see supplies cut by as much as 20 million barrels per day — or a fifth of world output — if G20 member states agree to participate in the historic deal, which was reached after four days of painstaking negotiations by video conference.
OPEC member states, as well as Russia, will cut their collective production by 9.7 million barrels per day, with the U.S., Canada and Brazil contributing 3.7 million barrels per day. Other G20 states will reduce their output — largely because of a slump in demand triggered by the coronavirus pandemic — by 1.3 million barrels.
“The issue is that we are seeing significant levels of demand destruction right now – and these cuts are still falling short of bringing the market to balance over 2Q20,” said ING’s head of commodity strategy Warren Patterson. “So we are still set to see a sizeable inventory build over the quarter, which should keep the market at depressed levels.”
“While we may see some mandated cuts from other producers, it appears that the bulk of the decline in output will be market-driven rather than mandated,” he added.
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Brent crude futures contracts for June delivery, the benchmark reference for around 60% of global crude purchases, opened 15 cents lower at $31.33 per barrel in initial trading Sunday before gaining $1.25 per barrel to trade at $32.73 and well south o the levels seen when President Donald Trump first revealed the production cut arrangement on April 2.
WTI crude futures for May delivery, which are more tightly connected to domestic gas prices, fell 61 cents to $22.15 before rising $1.02 to trade at $23.78 per barrel.
Market reaction to the cuts, however historic, was mitigated by the fact that the reference point for the reductions will be April, a month during which Saudi Arabia had pledged to pump around 12.3 million barrels of crude was it ramped-up its price war with Russia.
That effectively means the first phase of the cuts — from May until June — will amount to around 7 million barrels per day for OPEC+ and slide to 5 million barrels per day over the second half of the year.
President Trump last week first floated the idea of output cuts when he tweeted that Saudi Arabia and Russia had agreed to reductions that could reach 15 million barrels a day.
Trump added further pressure on the cartel’s discussions, which are expected to be followed by a G20 teleconference on Friday, by threatening to slap “very substantial” tariffs on non-U.S. crude imports in order to protect jobs in the American energy industry.
“If I have to do tariffs on oil coming from outside or if I have to do something to protect our tens of thousands of energy workers and our great companies that produce all these jobs, I’ll do whatever I have to do,” Trump told reporters late Sunday after weekend meetings with energy executives at the White House.
The president has also insisted that U.S. drillers have “already cut” production. That view could be justified by a record gain in U.S. crude inventories (which rose by 15.2 million barrels last week), capex and spending reductions unveiled by companies such as ExxonMobil and Chevron Corp. , and the steepest slide in rig installations around the Gulf of Mexico and the shale-rich Permian Basin in at least five years last week.
U.S. participation in an output-cut agreement would also be complicated by antitrust regulations, although some experts have said that government officials could order the cuts directly in order to skirt existing legislation.