A month after embarking on a savage price war, Russia and the Saudi-led oil-exporting cartel, OPEC, led by Saudi Arabia, finally managed to come to an agreement. Thursday, April 9, at the end of a very long videoconference meeting, the countries of the so-called OPEC + group (which brings together OPEC members, Russia and a dozen other countries, representing half of the world’s supply ), agreed to impose drastic quotas. The term “drastic” seems weak given the unprecedented gesture: in May and June, they will reduce their production by about 10 million barrels per day, or 10% of world consumption before the epidemic due to the coronavirus.
For the record, the biggest drop of this type dates back to the 2008 financial crisis, when OPEC cut supply by 2.2 million barrels a day.
Price war
The objective of the oil countries is to limit the spectacular fall in prices in recent weeks: while the price was around 70 dollars per barrel in early January, it plunged below 25 dollars in late March, before rising slightly in April around 30 dollars. Prices have collapsed due to the very sharp drop in demand in China, then in the rest of the world, with the containment measures taken to limit the pandemic. But they had mostly plunged when Riyadh and Moscow wanted to take advantage of the situation to crush their American competitors, launching into a frantic price war.
This strategy has backfired. Oil continues to sink into the crisis: global demand has fallen from 25% to 35%, and it does not seem ready to go up, as the measures hindering displacement are likely to be lasting and global.
For several days, Russian President Vladimir Putin and Saudi Prince Mohammed Ben Salman (MBS) have suggested that they were ready to act, but only if the United States, the world’s largest producer, also promised to reduce the sails – which would be completely new to the Americans. Donald Trump blew hot and cold: he supported the principle of such a reduction agreement, without making any commitment.
In fact, Saudi Arabia and Russia will make the biggest effort: the two oil giants will each reduce their respective production by more than 2.5 million barrels daily. OPEC + is also waiting for countries outside the alliance – particularly the United States and Canada – to pledge to cut production by 5 million barrels a day. A meeting of energy ministers from G20 countries on Friday could endorse such a move.
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