Saudi Arabia, Russia and other oil-producing nations struck on deal on 12th April to cut about 10% of global production, but demand is down by much more than that.
The agreement by major oil producers to reduce their daily production by 9.7 million barrels starting in May was the largest cutback in history. This will be followed by smaller, scheduled production cuts running through April 2022.
It was the result of an impressive coordination by more than 20 nations led by Saudi Arabia and Russia with mediation from the US. But it probably still won’t be enough.
Goldman Sachs warned that the ‘historic but insufficient’ deal would not go far enough to prevent supplies from overwhelming the world’s oil storage facilities and forcing producers to shut their wells.
The US bank said oil prices would fall further in the coming weeks because the voluntary production cuts brokered by Opec were still too little too late to tackle a 19m barrel a day demand slump during April and May 2020.
Demand for oil has tumbled in recent weeks as the coronavirus pandemic has crippled global commerce and eliminated untold numbers of commutes, plane trips and cargo shipments. Experts estimate that demand has fallen by somewhere between 25 million barrels and 35 million barrels a day — or up to three and a half times as much as what the oil nations are promising to cut.
News of the deal briefly lifted oil prices on 13th April but those gains faded over the course of the day. The US oil price benchmark ended the day at $22.41, or less than half of where it was at the start of the year. Had the group of oil-producing nations, known as OPEC Plus, not reached a deal, oil prices would have collapsed, industry experts said.
Leaders of the US oil industry, which is responsible directly and indirectly for roughly 10 million jobs, welcomed the deal and President Trump’s role in mediating a halt to a Saudi-Russian price war. But even they acknowledged that it would not end their financial difficulties.