OPEC+ agrees to historic output cuts

The 9.7 million barrel per day cuts will not cover demand lost due to coronavirus, but will provide some relief for storage capacity

OPEC, OPEC+, Coronavirus, Covid-19

The Organisation of Petroleum Exporting Countries and its allies (OPEC+), led by Saudi Arabia and Russia, have agreed to cut production by 9.7 million barrels per day in May and June. This comes as oil prices have plummeted due to the coronavirus pandemic, which has slashed demand, and a dispute between Saudi Arabia and Russia.

This deal is the largest output cut in OPEC's history, more than four times deeper than its previous record in 2008. Still, analysts say it likely will not be enough to make up for lower demand due to coronavirus.

"Even though OPEC+ has decided to attempt to bail out the global oil market, the group has unfortunately only come up with half of the ransom money," said Bjornar Tonhaugen, head of oil markets at Rystad Energy. "We believe the market’s disappointment will reflect in prices already from April due the lack of size and the speed of the supply removal."

However, it would help reduce strain on storage capacity. "This is at least a temporary relief for the energy industry and for the global economy," said Per Magnus Nysveen, head of analysis at Rystad Energy. "This industry is too big to be let to fail, and the alliance showed responsibility with this agreement. Even though the production cuts are smaller than what the market needed and only postpone the stock building constraints problem, the worst is for now avoided."

"The rest of oil producing countries should also prepare to cut output to align with domestic refineries and fuel consumption, which is expected down globally by 27 million bpd in April and 20 million bpd in May," Nysveen added.

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