OPEC and Russia reached a provisional agreement Thursday evening for a global cut in oil production by 10 million barrels a day for May and June, the deepest cut ever agreed to by the world’s oil producers, The Guardian reports.
The two sides said they expected the United States and other producers to join in their effort to prop up prices hammered in the coronavirus crisis. The decline in production amounts to only about 10% of the world’s normal supply of oil, far below the estimates for how much demand for oil has collapsed in the wake of the coronavirus crisis. And it is unlikely to stem the massive plunge in oil prices in recent months.
The deal was reached as oil ministers from OPEC and a number of non-OPEC oil producers held a video meeting on Thursday. It began with OPEC Secretary-General Mohammad Sanusi Barkindo sounding the alarm about both oil prices and demand.
“For the oil market, [the coronavirus] has completely up-ended market supply and demand fundamentals since we last met on March 6,” he said. “Our industry is hemorrhaging; no one has been able to stem the bleeding.”
Barkindo said that projections call for the demand of nearly 12 million fewer barrels per day in the current quarter. “These are staggering numbers! Unprecedented in modern times,” he said.
At that rate, “Given the current unprecedented supply and demand imbalance there could be a colossal excess volume of 14.7 million barrels a day in the second quarter of 2020,” he said.
Even those dire forecasts may be too optimistic, as they could be underestimating how much demand has fallen as people are ordered to stay inside and with all but essential businesses shuttered in much of the world.
Tom Kloza, the chief oil analyst for the Oil Price Information Service, told CNN he believes demand is down as much as 18 million to 20 million barrels a day. “This cut is woefully inadequate to stabilize prices into at least the summer,” he said Thursday evening.
The deal would see the output reduced to 8 million barrels a day from July to December followed by a 6 million barrels a day reduction from January 2021 to April 2022.
Non-OPEC member Mexico, however, is expressing reservations about the length of the agreement, according to sources. Iran, Libya, and Venezuela would be exempted from the output cuts due to sanctions or lost production.