A crude deal: too little, too late?

On Thursday, Opec+ announced an agreement to cut the global crude output by 10 million barrels per day (bpd). This was unprecedented.

The next day, after a five-hour-long virtual meeting, G20 energy leaders endorsed the agreement, pledging to do “whatever it takes” to stabilise the oil markets.

From refusing to agree to a combined output cut of 1.5m bpd on March 6, the Opec+ — which comprises the Organisation of the Petroleum Exporting Countries and the Russia led non-Opec oil producers — has come a long way to agree to a 10m bpd cut. The pandemic has played its role.

Yet, there are loose ends. The specifics of the deal are still not very clear. Russia has reportedly agreed to slash its output by 2m bpd. Saudi Arabia, meanwhile, has agreed to shave 4m bpd off its record-setting April production levels of 12.3m bpd – for a cap of 8.3m bpd.

Initial reports from unofficial Opec sources had suggested that Russia and Saudi Arabia were expected to bring down their production to around 8.5m bpd.

The deal was only possible after US President Donald Trump exerted intense pressure on Russia and Saudi Arabia.

He held talks with Saudi Arabia’s King and Crown Prince, threatening them with sanctions if they failed to reach an agreement on output. Trump also spoke to Russian President Vladimir Putin, saying tariffs could be imposed on Russian oil sales if no deal was reached.

Other spanners were at work too. On Thursday, during the Opec+ meeting, Mexico – part of the non-Opec group of producers led by Russia –disagreed with the proposal to reduce its output by 400,000 bpd, offering to cut its production by 100,000 bpd instead. This risked the entire deal. In its official release, Opec made it clear, the deal was “conditional on the consent of Mexico.”

Trump had to intervene again. Next day, he called the Mexican President Andres Manuel Lopez Obrador. After the talks, Obrador said he has reached an understanding with the US president that the United States will cut its output by another 250,000 bpd, to compensate for the lack of Mexican compliance with the output cut deal.

What was to be the contribution of players out of the Opec+ ambit, remains an interesting part of the equation? President Trump has been saying for a while that the market would naturally force US production down, effectively “cutting” along with Opec as a matter of course. But the statement from the Mexican president that the US would take up the remaining share of the output cut imposed on his country, indicated that the US was also formally a part of the deal.

US Energy Secretary Dan Brouillette told the conference the US was already on track for a production decline of 2m to 3m bpd. Further, he underlined, “the United States is taking action to open strategic petroleum reserve to store as much oil as possible. This will take surplus oil off the market at a time when commercial storage is filling up and the market is oversupplied.”

Canadian Prime Minister Justin Trudeau also did not say specifically commit to any cut.

Sources indicate, Norwegian new petroleum and energy minister was thinking to “consider a unilateral cut” if that supported their resource management and economy.

But, even if the producers follow up religiously with their commitments to cut output, would that be enough to stem the crude rot? It seems no.

Hardly a week before, good, old friend, Fatih Birol of IEA was quoted as saying that the Opec and its allies could not do much in the given circumstances. Even if the Opec+ group and other major oil producers in the world were to agree to deep production cuts, they would be unable to prevent what is sure to be an enormous global inventory built this quarter due to unprecedented demand destruction, Birol had told Reuters a week before.

Global demand destruction is huge. Most agree that global consumptions is down by at least 25 per cent. Others say it could have even gone beyond 30pc, equivalent to 30m bpd.

What difference could then, an optimal output cut of 10-15m bpd make? And the impact of coronavirus pandemic could alter the lifestyle on a rather permanent footing, some continue to speculate. If that happens, global consumption would get hit on a permanent basis.

The overall crude spectre continues to be bleak, despite the unprecedented cut.
Source: Dawn