The Organization of Petroleum Exporting Countries (OPEC) reached an agreement on Apr. 12 that ended a price war between the Russian Federation and the Kingdom of Saudi Arabia to counter the economic effects of the coronavirus on the oil industry. Oil prices had hit an 18-year low at $22 a barrel last month, with demand falling by one-third as airlines grounded flights and industries slowed supply chains.
The initial details of the agreement that were released on Apr. 9 saw OPEC countries cutting production by about 10 million barrels per day starting May 1. This reduction would be more than twice the cuts made by cartels in 2008. Other nations, including Canada and Norway, are limiting production by an additional 5 million barrels a day. However, an independent analyst told BBC that the Apr. 12 deal did not limit production as much as expected.
Price slashes enacted by Russian President Vladimir Putin, Saudi Crown Prince Muhammad Bin Salman and Mexican President Andres Obrador could have resulted in lower limits on production. Saudi Arabia wanted each country to limit production by equal amounts, but was forced to set aside this demand due to United States intervention, as President Trump facilitated a negotiation between the Mexican President and the Crown Prince. In the process, the United States agreed to take on additional cuts to make up for the reduced cuts by Mexico. President Trump claimed that the US will be compensated for picking up ‘the slack’ but has not given any further details in this regard.
With a deal in place, Russia and Saudi Arabia, who estimated a daily production rate of 11 million barrels each, are now expected to limit production to about 8.5 million barrels. G20 countries have backed the deal but are not officially required to follow through with commitments to limiting production. Russia did not keep its promises to cut oil production in 2019, giving little reason to expect anything different in the coming months.
As of Apr. 9, oil prices have fallen by 10 percent due to traders' uncertainty in OPEC’s deal to counter the fall in demand. Further, after a brief rise following the Apr. 12 news, prices fell again on Apr. 13. Experts say reduced production, even by over 15 million barrels per day, may not raise prices enough to counter the economic effects of the virus. The summer is expected to bring more cuts, possibly dropping prices below $20 per barrel.
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