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The US and the G20 endorsed the largest oil supply agreement in history on Friday (10), putting their weight behind OPEC and Russia production cuts and committing to doing whatever it takes to stabilize an industry devastated by the coronavirus pandemic. See the behind-the-scenes here.
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Demand for oil has fallen by about a third as some of the world’s largest economies were locked down to try to curb the spread of the virus, driving oil prices to their lowest level in 18 years and threatening millions of jobs in the energy sector and long-term damage to supplies. A preliminary statement from the meeting said G20 members “would commit to doing whatever it takes, individually and collectively” to ensure the energy sector recovers. “We welcome the commitment of producers to stabilize energy markets,” the draft stated. “We urge other producing and consuming countries to complement these efforts.”
Early on Friday morning, OPEC and Russia agreed to a deal to cut 10 million barrels per day from global supply, the largest supply reduction ever made as producers moved to boost the global oil market. Alexander Novak, Russia’s Energy Minister, told the meeting that “the G20’s role is to comprehensively support these efforts [agreed by OPEC +].”
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This measure is the latest in a series of efforts by governments, central banks, and international institutions to sustain the global economy in the face of the Covid-19 crisis, which is pushing nations around the world into a deep recession. Speaking at an emergency online meeting of G20 energy ministers on Friday, Fatih Birol of the International Energy Agency said that the “shockwaves” from the virus had created the oil crash and threatened “global economic stability.”
“No one should harbor the idea that these measures provide a quick fix,” Birol said, who leads the world’s foremost energy body. “[But] just as the effect of lockdowns on the spread of Covid-19, actions to counteract the oil market imbalance will help to reduce the peak and flatten the curve.”
The implicit support for OPEC’s agreement, which aims to remove 10 million barrels per day from the market, marks a diplomatic victory for US President Donald Trump, who pressured Saudi Arabia, OPEC’s most powerful member, and Russia to end a month-long price war that exacerbated the crisis in energy markets. He held talks with Saudi Crown Prince Mohammed bin Salman and Russian President Vladimir Putin on Thursday and Friday, threatening tariffs on oil sales if an agreement was not reached.
Trump did not have to commit to any mandatory cuts for the US. Trump also offered to help smooth out the remaining wrinkles of OPEC + to finalize their agreement, which was held back by Mexico’s reluctance – one of the non-OPEC countries that joined the cartel in cuts – to remove as much supply as the other OPEC members agreed. Trump said he tried to fool Mexico, “adding that the US would help Mexico and reimburse us… at a later date when they are ready to do so.” Analysts said the US had proposed to cover Mexico’s obligations under the agreement, although it was unclear how it would do so.
Saudi Arabia has not commented since the G20 meeting whether Mexico’s reluctance remains a threat to the agreement’s health. Russian President Vladimir Putin considers the agreement to be closed, Kremlin spokesman Dmitry Peskov said on Friday. US production is already falling due to the collapse in oil prices, but the US and Canada have stopped committing to additional supply restrictions from the government, pointing to large-scale cuts in capital spending by private energy companies.
Dan Brouillette, the US Secretary of Energy, said at the conference that he estimated US oil production would be reduced by nearly 2 million b/d this year, or at least 10% of the country’s production. “This is a moment for all nations to seriously examine what each can do to correct the imbalance between supply and demand,” Brouillette said. The talks concluded on Friday evening, UK time, after more than five hours, with some minor issues being resolved before a statement was issued, according to a person familiar with the negotiations.
Roger Diwan of IHS Markit said the scale of the crisis forced the US to at least offer support for the supply cuts, despite Trump’s long-standing animosity toward OPEC. He often blames it for trying to raise oil prices at the expense of American drivers. “Reality and pragmatism have finally set in,” Diwan said, adding that the supply agreement was “about seven times larger than measures taken during the 2008-09 financial crisis.” “This massive cut is dictated by an even greater collapse in demand, forcing all global producers to intervene collectively in order to avoid the collapse of the oil industry.” Despite G20 support, doubts remain whether the measures taken will be sufficient. The oversupply still threatens to max out storage facilities worldwide within months, even if supply cuts have bought time.
This may still potentially force uncoordinated shutdowns of oil fields, which could cause long-term damage to reservoirs and future supplies. Widespread bankruptcies in the US shale sector are still expected, threatening the US’s position as the top oil producer and Trump’s doctrine of “energy dominance in the US.”
Oil traders are also skeptical about the count of production cuts caused by lower prices as contributions to decrease supply, since they would happen regardless of any agreement. Brent oil, the oil benchmark, initially recovered on Thursday before falling nearly 15% from its peak, back to nearly US$ 30 per barrel.
It was trading at US$ 70 a barrel in January before falling to nearly US$ 20 earlier this month. Markets were closed on Friday for Easter. But an oil market in which the world’s most powerful energy producers are coordinating, at least to some extent, is widely seen as more stable than the rest in free fall. “Even if poorly implemented, the agreement is substantial and will make a difference in the market,” said Ann-Louise Hittle of Wood Mackenzie.
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