The Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC oil producing nations, led by Russia, reached a historic agreement on Thursday to temporarily cut oil production in an effort to help stabilize a market that has been rocked by a price war and the coronavirus pandemic.
On the sidelines of a marathon video conference, an alliance of some of the world’s most powerful oil producing countries, referred to as OPEC+, agreed to a historic ten million barrels per day production cut that would apply to the May-June period. The reduction agreed upon accounts for around 23 percent of the participating countries' production levels of October 2018.
A statement issued by OPEC on Thursday noted that OPEC+ countries agreed to "adjust downwards their overall crude oil production by 10.0 mb/d, starting on 1 May 2020, for an initial period of two months that concludes on 30 June 2020."
The emergency meeting, which was called by Saudi Arabia, came amid a crash in oil prices driven by the kingdom's massive discounts in prices to its customers in Asia, the United States and Europe. Riyadh’s move was a response to Moscow's refusal to tighten supply in order to counter the effects of the recent outbreak of the coronavirus known as COVID-19, which has sent oil prices tumbling.
Oil prices fell to $27 per barrel in early March following OPEC's failure to reach an agreement with non-OPEC oil producing nations as Saudi Arabia and Russia, two of the world's top oil produces, announced production increases beginning on April 1.
During Thursday's meeting, country representatives managed to overcome their differences before committing to a ten million barrels per day cut. As part of the deal, Saudi Arabia, OPEC's de-facto leader, pledged to slash its production by 3.3 million barrels a day, while Russia is expected to reduce output by 2 million barrels a day.
According to the OPEC statement, OPEC+ producers agreed to remove ten million barrels per day until July when the cut will taper to eight million barrels per day for the rest of the year. Beginning in January 2021, reductions would decrease to six million barrels per day and continue through April 2022.
"The baseline for the calculation of the adjustments is the oil production of October 2018, except for the Kingdom of Saudi Arabia and the Russian Federation, both with the same baseline level of 11.0 mb/d," the statement added.
Meanwhile, Mexico's refusal to support the deal cast doubts over the pact and its ability to revive oil prices. OPEC+ ministers were reportedly trying to persuade Mexico to cut its oil output by 400,000 barrels per day. Following the meeting, Mexico’s Secretary of Energy Rocío Nahle said in a Tweet that the country would be willing to cut its production by 100,000 barrels per day for the next two months.
The group urged the US, Canada and other developing and developed economies to follow their example and supplement the deal by another five million barrels a day at a virtual meeting of energy ministers from the G20 on Friday.
Oil prices initially rallied on Thursday after news of the OPEC+ deal surfaced, before falling later in the day on fears that the agreement would not offset the historic drop in global demand. International benchmark Brent crude fell 2.5% to close at $32 per barrel on Thursday as US West Texas Intermediate (WTI) lost 9.4% to settle at $22.76 per barrel.