Saudi Arabia and Russia reached an agreement with other oil-producing nations on Sunday to cut output by 9.7 million barrels per day for the next two months, in an effort to stem a plunge in oil prices brought on by the coronavirus pandemic and feuding between Moscow and Riyadh.
OPEC+, a group that includes OPEC members as well as allied non-members like Russia and Mexico, finalized the deal on Sunday after days of marathon negotiations.
The agreement is massive, representing the largest slash to production in the history of OPEC. The cut is more than twice as large as the 4.2 million-barrel-per-day reduction the oil cartel made through a series of cuts during the 2008 financial crisis. But analysts say it will likely be dwarfed by the size of pandemic-driven demand loss.
The deal also marks the rejuvenation of the broader OPEC+ alliance, which was in uncertain territory in recent weeks as Saudi Arabia and Russia waged a grueling price war with each other.
The United States, which does not participate in OPEC+ meetings, had been pushing Moscow and Riyadh to come to a settlement. President Trump spoke with Russian President Vladimir Putin and Saudi King Salman on a conference call on Thursday, White House aide Dan Scavino said on Twitter.
But while all eyes were on Russia and Saudi Arabia heading into the discussion, Mexico played an unexpectedly central role in the talks. Mexico balked at the size of its expected contribution, delaying the deal by several days.
The new cuts, despite their historic size, may not do much to shore up oil prices, which fell some 5% as the OPEC+ cuts were initially being hashed out on Thursday. (Markets were closed for the holiday weekend as the deal was finalized.)
Brent crude, a closely watched global benchmark, is currently around $32 a barrel — less than half its price at the start of the year. Those low crude prices have driven the national average for U.S gasoline well under $2.
The coronavirus pandemic has destroyed oil demand to a remarkable degree. Lockdowns in large parts of the world mean less driving, less flying and reduced manufacturing output — all of which leads to reduced need for fossil fuels.
Rystad Energy, an independent energy consulting firm, has estimated that before these cuts the world was on track for an astonishing 28 million-barrel-per-day oversupply in April. Even with dramatically reduced output from OPEC and its allies, the world's oil producers are still bracing for an oversupplied market, low prices and losses.
Sunday's agreement follows a busy week for oil ministers. On Friday, the Group of 20 held a separate virtual meeting to discuss the state of the world's oil markets, raising speculation that even more cuts to production may be possible. (The G20 includes producers like Canada and the U.S. that aren't party to the OPEC+ cuts.) However, that meeting ended without any new commitments publicly announced.
President Trump said Friday that the U.S. could make cuts in oil production to "pick up the slack" caused by Mexico's unwillingness to make deep cuts. It's not clear how such cuts would be made, since the White House does not dictate production levels of private oil companies; it would be a remarkable shift in U.S. policy if the country began making voluntary cuts in oil production.
In recent weeks, as low oil prices put pressure on American producers, companies have been divided on whether they want government intervention. But they've been united in frustration with the Saudi-Russia price war. Extremely low prices will result in cuts to American output — long desired by Russia and Saudi Arabia — as oil wells become too costly to operate.
The U.S. Energy Information Administration has already projected that the United States will soon return to its previous status as a net energy importer, as a result of the shifts in global oil markets.
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