- Members agreed to the largest drop in production in the organization's history (10 million barrels per day).
- The closure of heavy industries and aerospace, following the crisis caused by the Coronavirus, was a key factor.
- Russia and Saudi Arabia have also been involved in a price war, causing prices to plummet.
With declining oil demand following the Coronavirus Crisis, major oil-producing countries have reached a historic agreement to cut production by 10 million barrels per day. The move is a small step in easing concerns about falling oil prices. It also marks the improvement of relations between Saudi Arabia and Russia, two powerful OPEC Plus blocs.
At a meeting of the Organization of the Petroleum Exporting Countries (OPEC), which was also attended by non-member countries, members agreed to the largest drop in production in the organization’s history (10 million barrels per day) in May and June. Despite efforts to keep oil prices afloat, the price of this valuable commodity continues to fall.
This is due to several factors: the closure of heavy industries and aerospace, following the crisis caused by the Coronavirus, and the ongoing price war between Saudi Arabia and Russia. That’s why some members don’t like it. Since the start of the Coronavirus pandemic, demand for oil has fallen by 30 percent, to about 30 million barrels a day.
“This is a very disappointing situation,” said David R. Neuberger, head of the global pricing unit at S&P Global Platts. “In today’s oil market, 20 million barrels of oil have been destroyed by the coronavirus.”
The move marks a sign of improving relations between the two powerful blocs of OPEC Plus: Saudi Arabia, as the largest oil producer in OPEC, and Russia, a non-member country with high influence among members. Both countries have been embroiled in a price war since early March, which resulted in a 34 percent drop in US oil prices to a four-year low. OPEC Plus talks resumed after U.S. President Donald Trump forced Riyadh and Moscow to hold telephone talks.
Despite the potential losses from the US shale oil industry, which had previously been hit by recession and unemployment, a senior Trump administration official said the United States would abide by its commitments at the G20 summit. “Adherence to the commitments carries the message that all oil-producing countries are really reacting to the changes caused by the Coronavirus epidemic in the market,” the official added.
Despite OPEC Plus pressure on the United States to reduce production, due to anti-monopoly laws in the United States, it is not possible to formally reduce production, such as in Saudi Arabia and Russia. “The numbers are so low that there will be layoffs all over the world,” Mr. Trump said at a White House news conference, in an apparent reference to oil prices. “There will be certainly layoffs in this country, and we don’t want that to happen.”
Barbara Sicalides, an expert on anti-monopoly laws at the Pamper Hamilton law firm, believes that while corporate co-ordination is usually illegal, federal government licenses can allow these companies to co-ordinate. Amrita Sen, a chief oil analyst at Energy Aspects, a research firm, said, “in a nutshell, the demand declines are going to be greater than the production declines.”
“With the sharp decline in demand, global producers will be forced to shut in production because we will run out of storage space, “ she said. “OPEC-plus is simply codifying what they would have had to cut anyway.”