Tue, Apr 14, 2020 page10

• Oil price row ends with historic deal

  DEAL BLOCKER: Mexico won a diplomatic victory, only having to cut 100,000 barrels, but its future inside OPEC+ is uncertain, as it is deciding whether to leave the alliance

  • Bloomberg
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  The world’s top oil producers pulled off a historic deal to cut global petroleum output by nearly a 10th, putting an end to the devastating price dispute that brought the energy industry to its knees.

  After a week-long marathon of bilateral calls and video conferences of ministers from the OPEC+ alliance and the G20, an agreement finally emerged to tackle the impact of the COVID-19 pandemic on oil demand.

  Prices rose about 1 percent to about US$32 a barrel in London after swinging wildly in the first few minutes of trading following the deal.

  The focus now shifts to whether the cut will be enough to dent the massive glut that keeps growing as the virus shuts down the global economy.

  The talks had almost fallen apart late last week — amid resistance from Mexico — but came back from the brink after a weekend of urgent diplomacy. US President Donald Trump intervened, helping broker the final compromise.

  “Unprecedented measures for unprecedented times,” said Ed Morse, a veteran oil watcher who is head of commodities research at Citigroup Inc. “Unprecedented in historical discussions of production cuts, the US played a critical role in brokering between Saudi Arabia and Russia for the new OPEC+ accord.”

  OPEC+ nations are to cut 9.7 million barrels a day — just below the initial proposal of 10 million.

  “We have demonstrated that OPEC+ is up and alive,” Saudi Arabian Minister of Energy Prince Abdulaziz bin Salman told Bloomberg News in an interview minutes after the deal was done. “I’m more than happy with the deal.”

  The accord caps a tumultuous month when Brent crude, the global benchmark, plunged to its lowest in nearly two decades, falling toward US$20 a barrel.

  Earlier this year, it traded above US$70 a barrel. OPEC+ ministers had to race onto a video conference call on Sunday, less than four hours before the oil market reopened, to close the deal.

  Brent futures yesterday jumped 8 percent in the first seconds of trading in Asia, before dropping more than 1 percent in a rapid reversal.

  By 8:13am in London they were up 0.8 percent again at US$31.72 a barrel.

  The US, Brazil and Canada are to contribute another 3.7 million barrels on paper as their production declines and other G20 states are to contribute 1.3 million. Still, the G20 numbers do not represent real voluntary cuts, but rather reflect the impact that low prices have already had on output and would take months, perhaps more than a year, to come into effect.

  Mexico won a diplomatic victory as it is only to cut 100,000 barrels — less than its pro-rated share, having blocked the deal since the plan was first revealed on Thursday.

  Its future inside OPEC+ is uncertain, as it is expected to decide over the next two months whether to leave the alliance, delegates said.

  The biggest winner appears to be Trump, who refused to actively cut US oil production and personally brokered the deal over phone calls with Mexican President Andres Manuel Lopez Obrador, Russian President Vladimir Putin and Saudi Arabian King Salman bin Abdulaziz Al Saud.

  Trump became the first US president to push for higher oil prices in more than 30 years, reversing his personal opposition to the cartel.

  “I hated OPEC. You want to know the truth? I hated it. Because it was a fix, but somewhere along the line that broke down and went the opposite way,” Trump told reporters at the White House last week.

  The production restraints are set to last for about two years, although not at the same level as the initial two months.

  Copying the model adopted by central banks to taper off their bond buying, OPEC also plans to reduce the size of the cuts over time. After June, the 10 million barrel cut is to be tapered to 7.6 million a day until the end of the year, and then to 5.6 million through next year until April 2022.

  The deal does not take effect until May 1, leaving OPEC+ countries, which have significantly increased production over the last month, able to continue flooding the market for nearly another three weeks.

  Goldman Sachs Group Inc called the cuts “too little and too late,” saying they would only lead to an actual reduction of about 4.3 million barrels a day from first quarter levels.

  “Ultimately, this simply reflects that no voluntary cuts could be large enough to offset the 19 million barrels a day average April-May demand loss due to the coronavirus,” the bank said in a report.
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