The world’s top oil-producing nations used the G20 talks on Friday in an attempt to finalize a deal on crude oil production cuts aimed at preventing the industry from collapsing.
President Donald Trump has spoken to both Saudi Arabia’s Crown Prince Mohammed bin Salman and Russian President Vladimir Putin in an attempt to break an impasse between the world’s second- and third-largest oil producers, which have been locked in a bitter price war for weeks.
— G20 Saudi Arabia (@g20org) April 10, 2020
A deal still looked uncertain after discussions on Friday, however, as the final details of the agreement threatened to derail the process. A tentative agreement was reached between the OPEC+ nations (which includes Russia) on Thursday to cut 10 million barrels of production per day, or around 10 percent of global capacity.
The double-whammy of low prices and a flooded market have punished oil exporters already suffering the fallout from the CCP (Chinese Communist Party) virus, commonly known as the novel coronavirus. Efforts to fight the virus have meant travel bans and industrial shutdowns, compounding over-production in global oil fields to send prices into a tailspin.
An OPEC+ meeting in Vienna at the end of March aimed at agreement on production cuts ended in disarray when Russia and Saudi Arabia could not reach a consensus. Saudi Arabia then decided to rush extra capacity into an already over-supplied market, exacerbating the problem.
“The extreme volatility we are seeing in oil markets is detrimental to the global economy at a time when we can least afford it,” said International Energy Agency Director Fatih Birol in a statement. “Today’s oil crisis is a systemic shock that threatens global economic and financial stability.”
In a statement on Friday, U.S. Energy Secretary Dan Brouillette said: “The United States has seen its oil industry gravely impacted. We estimate that by the end of this year, U.S. production will see a reduction of nearly 2 million barrels per day. Some models show even more dramatic figures, for example, up to 3 million barrels per day.”
“Make no mistake,” Brouillette added, “today’s crisis transcends the interests of any one nation and requires a swift and decisive response from us all. Failure to act has far reaching consequences to each of our economies.”
Good Friday Deliberations
The deal reached Thursday was almost scuppered by protests from Mexican President Andrés Manuel López Obrador after OPEC+ proposed stinging production cuts of 400,000 barrels per day for Mexican oilfields. López Obrador credited Trump with brokering an agreement for Mexico to reduce the cut to 100,000 barrels—a reduction from 23 percent down to 5 or 6 percent of Mexican production. The United States would undertake cuts of 250,000 barrels per day on Mexico’s behalf, López Obrador told reporters in a press conference.
Trump suggested last week that the United States could impose tariffs on oil imports if an agreement could not be reached.
Prices for Brent crude plummeted to as low as $23 per barrel in the aftermath of the CCP virus crisis, though they have rebounded since to close at $31.48 in Thursday trading. Brent had been trading between $50 and $60 per barrel in February.
However, analysts do not expect dramatic increases in crude prices even if a deal can be brokered, as a slump in global demand of around 30 percent will likely continue to outstrip proposed cuts of 12 to 15 percent made on the supply side—at least until economies reopen and factors such as industrial production, the associated shipment of raw materials and finished products, and commuting and travel return to a degree of normality.
With many countries having already taken advantage of historically low prices to fill strategic reserve capacity, and tankers full of crude on the high seas serving as floating storage, clearing backlogs in demand may take time.
The OPEC+ bloc—consisting of 13 oil-producing countries plus Russia—intends to cut global production by about 10 percent, but is still negotiating with others nations such as the United States, Mexico, and Canada to cut another 5 percent.
According to Reuters, OPEC’s Secretary General Mohammed Sanusi Barkindo said Friday: “[Any] shortfall in investments in the coming year could sow the seeds for future energy security issues in the years ahead. It is in all of our interests to support stability in this vital global industry.”
Brouillette said that the United States was taking action to open the U.S. Strategic Petroleum Reserve to store as much oil as possible, taking surplus oil off the market. He said America’s goal is to ensure price stability, guarantee free and fair markets, and preserve livelihoods across the United States.
“We must stabilize world energy markets by putting an end to this dangerous price decline,” he said. “As we all know, several countries were discussing an agreement to cut 10 million barrels per day out of the market, but the agreement never materialized. This is extremely disappointing.
“This is a time for all nations to seriously examine what each can do to correct the supply/demand imbalance. We call on all nations to use every means at their disposal to help reduce the surplus.”
However, it remains to be seen what effects—if any—an agreement might bring. According to Reuters, UBS bank has suggested that the cuts will not be enough to stave off oil prices in the teens. “We still see Brent falling to $20 per barrel or lower in the second quarter of 2020,” UBS said in a statement.
Reuters contributed to this report.