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OPEC+ Reaches Agreement to Cut Production Putting an End to Oil Price War

oil OPEC

After several discussions and meetings held throughout last week, OPEC+ finally struck a deal to cut oil production by 9.7 million barrels a day, in an effort to contain the price drop triggered by Saudi Arabia and Russia’s decision to boost production in March and the severe plunge in global energy demand resulting from the coronavirus outbreak.

This historic deal, which is so far the largest cut ever made by the organization, comes after the countries involved failed to secure an agreement on Thursday, as Mexico backed off from an early draft that forced the country to cut nearly 400,000 barrels per day.

US President Donald Trump appears to have played a key role in brokering this final agreement by negotiating a middle ground with Mexico’s President Andres Lopez Obrador, who reportedly agreed to cut his country’s output by a final amount of 100,000 barrels per day, while the US may have settled to cut 300,000 additional barrels to compensate for Mexico’s reduced quota.

The deal represents a 10% cut in global oil supply, yet OPEC’s official press release indicates that the cut will be made progressively, starting on May 1, 2020, while the oil organization also prompted non-affiliated members such as the US, Canada, and Norway “to provide commensurate and timely contributions to the efforts aimed at stabilizing the oil market”.

Brent futures, the global oil benchmark, showed little movement after the news and are currently trading at $31.61 in London’s market, posting a small gain of 0.4% so far in the day, while they accumulate a 52.1% year-to-date loss.

brent crude 1day price chart

OPEC is the name given to a global oil cartel founded in 1960, currently comprised of 13 major oil-producing countries including Saudi Arabia, Venezuela, Kuwait, and Nigeria. Meanwhile, OPEC+ is a short name used to describe meetings where certain non-OPEC allies participate to join forces with the cartel to make decisions on global oil output and other important matters.

Analysts conclude that while this cut was unprecedented and necessary, it may be insufficient to stabilize the price of oil as a result of the global health emergency, which has resulted in a 12% reduction in the demand for crude around the world.

In this regard, analysts from Goldman Sachs commented: “Ultimately, this simply reflects that no voluntary cuts could be large enough”. Meanwhile, Chris Midgley from S&P Global Platts further added that the cut “won’t be enough to bring sustainable, restorative support to oil prices, not unless OPEC goes further”.

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Alejandro Arrieche

Alejandro is a financial writer with 7 years of experience in financial management and financial analysis. He writes technical content about economics, finance, investments, and real estate and have also assisted financial businesses in building their digital marketing strategy. His favorite topics are value investing and financial analysis.