OPEC+, a group including OPEC countries and other oil producing nations such as Russia and Mexico, has agreed to cut output by a record 9.7 million barrels per day (bpd) in May and June, to counter the collapse of prices due to coronavirus outbreak that shred the demand.
This cut represents about 10% of the global supply before the coronavirus (Covid-19) outbreak.
The 9.7 million-bpd-cut will begin on 1 May and continue through end of June. The cut will then come down to 7.6 million barrels per day from July through the end of this year, and 5.6 million bpd from January 2021 through April 2022, reported Bloomberg.
An initial meeting was held on 09 April in which OPEC noted that the production cuts were “agreed by all the OPEC and non-OPEC oil-producing countries participating in the Declaration of Cooperation, with the exception of Mexico, and as a result, the agreement is conditional on the consent of Mexico.”
The agreement was stalled because Mexico wanted only a 100,000-bpd-cut, while it was expected to make a 400,000 bpd cut.
On Sunday, OPEC+ group held an emergency meeting, which resulted in a cut four times deeper than the previous record reduction which has been made in 2008.
The latest deal, which was sealed on Sunday, came after the US President Trump intervened to help resolve a Saudi-Mexico standoff that jeopardised the broader pact. Post this, Mexico was allowed to retain its 100,000-bpd cut stand.
OPEC+ has also wanted other major producers outside the group, such as the US, Norway, and Canada to together make further cuts of five million bpd.
Canada and Norway have agreed to do so, while the US said that low prices mean its output would already fall by over two million bpd this year without the proposed cuts.
Saudi Arabia, Kuwait and the United Arab Emirates (UAE) have voluntarily announced to make cuts deeper than those agreed, which would bring OPEC+ supply down by 12.5 million bpd from existing levels.
OPEC+ will meet again on 10 June to determine if more action is required.
Most analysts believe oil prices would fall further without these production cuts as storage would fill in a matter of weeks.
Last month, oil prices slumped to an 18-year-low due to the collapse of a supply cut agreement proposed by the Organization of the Petroleum Exporting Countries (OPEC).
This led to a price war between Saudi Arabia and Russia, after which both the countries increased oil production, leading to over-production and suppressing oil prices.
The standoff dropped prices of Brent crude LCOc1 to as low as $23 per barrel. However, the latest pact agreed on Sunday has put an end to the price war between Saudi Arabia and Russia.