• OPEC-plus originally proposed reducing output by 10 million barrels per day but Mexico balked
  • Donald Trump praised the deal, saying it will save American jobs
  • Goldman Sachs is skeptical the agreement will boost oil prices

On Sunday, the Organization of the Petroleum Exporting Countries and its allies agreed to reduce oil production by a record 9.7 million barrels a day in a bid to support crude prices which have plunged more than 40% since early March.

The oil producer group, known as OPEC-plus, originally proposed reducing output by 10 million barrels per day (or about 10% of global oil supply) but Mexico balked at the amount it was being asked to cut, thereby postponing the agreement until Sunday.

Under terms of final agreement, Mexico will now cut its output by 100,000 barrels per day, instead of the 400,000 figure it was initially requested by the other members.

The accord, which will become effective on May 1 and extend through the end of June, also put an end to a debilitating price war between Saudi Arabia and Russia which further dampened oil prices.

After the end of June, oil production cuts will ease to 7.7 million barrels per day through the end of 2020, and then drop down to 5.8 million barrels per day from January 2021 through April 2022.

U.S. President Donald Trump, who participated in hammering out a deal between Saudi Arabia and Russia, praised the agreement, citing it “will save hundreds of thousands of energy jobs in the United States.”

In tweets on Monday morning, Trump again praised the agreement.


Kirill Dmitriev, CEO of the Russian Direct Investment Fund, was just as optimistic as Trump.

“We believe that more than 2 million jobs in the U.S. will be saved as a result of President Trump’s leadership on this,” he said on Monday. “The total number of jobs in the U.S. oil and gas industry is 10 million. But if you count ... other industries affected by this, you’re talking about huge job numbers.”

Dmitriev added that Russian energy jobs will also be saved.

Dmitriev further said that: “Without this deal, oil prices would have gone a lot below $10 a barrel,” although he doesn’t think prices will rise too high now given how coronavirus has damaged global demand.

“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. “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.”

Ed Morse, Citi’s global head of commodities, wrote: “Unprecedented measures for unprecedented times. Unprecedented in historical discussions of production cuts, the U.S. played a critical role in brokering between Saudi Arabia and Russia to induce them to negotiate the new OPEC-plus accord.”

While OPEC-plus has expressed hope that other oil producing nations, including the U.S., Canada and Norway, will also scale back on their production, it’s unclear if Washington will do so.

Trump suggested changes in U.S. oil production would be determined by market forces.

U.S. Energy Secretary Dan Brouillette said on Friday that the U.S. may have to reduce output by about 2 or 3 million barrels per day by the end of the year.

For now, Brouillette expressed satisfaction with OPEC-plus’ decision.

“This could be the largest reduction in production from OPEC for perhaps a decade, maybe longer,” he said.

Dmitriev thinks non-OPEC producers will also scale back their outputs.

“You look at other nations, if you add up everything that will be happening with their declines of oil, you definitely have more than additional 5 million barrels [of reductions],” he said.

Frederick Kempe, president and CEO of the Atlantic Council, an American think tank, also anticipates further oil output cuts.

“You could have further agreements and announcements by G-20 members,” he said. “Some say it could add up to as much as 18, 19 million [barrels per day].”

Dan Yergin, vice chairman at IHS Markit, praised Trump for helping to carve out the agreement and lauded the deal itself.

“This agreement goes two years, so it’s also meant to manage the inventories downward over that period of time,” Yergin said. “What this has done is averted what really would have been a disaster for the oil industry and I think it does give some stabilization.”

However, oil markets have thus far had a muted reaction to the deal.

As of 9:35 a.m. EDT on Monday, West Texas Intermediate crude futures were up 2.59% at $23.35 per barrel, while Brent crude was down 0.16% at $31.43.

Some analysts think the output cut is insufficient.

Chris Midgely, S&P Global Platts’ global head of analytics, said that the reductions will not be enough “to plug the 15- to 20-million [barrel per day] near-term imbalance in the marketplace and avoid tank tops in May.” The cut, he added, “won’t be enough to bring sustainable, restorative support to oil prices, not unless OPEC goes further.”

Similarly, Goldman Sachs said the cuts were “too little and too late,” adding that in the real world they will only lead to a reduction of about 4.3 million barrels a day from the first quarter. “Ultimately, this simply reflects that no voluntary cuts could be large enough to offset the 19 million barrels a day average April to May demand loss due to the coronavirus,” the bank’s analysts wrote.

Some other analysts were cautiously optimistic.

“The pure size of the [output] cut is unprecedented, but, then again, so is the impact the coronavirus is having on demand,” said Mohammed Ghulam, an energy analyst at Raymond James.

Jason Kenney, the premier of Alberta, Canada’s largest oil-producing province, said: “OPEC-plus started the fire, and it was their responsibility to put it out. Many challenging months ahead with very low demand and huge inventories, but at least now there is path to recovery.”

Ann-Louise Hittle, vice president of macro oils at Wood Mackenzie, said the production cuts will eventually make a difference.

“We expect the second half of 2020 to show an implied stock draw, in contrast to the record-breaking oversupply of the first half of 2020,” she said.