The OPEC+ group, which includes OPEC members plus some non-member oil-producing nations, most notably Russia, has agreed a landmark deal that will see the world’s oil production cut by a tenth.
The agreement follows drastic drops in oil prices to less than $28 per barrel due to a combination of falling demand in the wake of the coronavirus overlaid on top of a pre-existing oversupply problem. In addition, Russia and Saudi Arabia were set to engage in a price war that would see them both pumping record volumes of crude, but this has, at least for now, been averted.
The production cuts are the deepest in history, double the scale of those implemented following the global financial crisis, yet some speculate that this in itself may not be enough to correct the oversupply problem. Indeed, the OPEC+ group has called for other big oil producers like the US, Canada, Norway, and Brazil to contribute further cuts that could potentially reduce overall production by 20%.
In the US, major oil companies like ExxonMobil and BP, the oil company behind Castrol lubricant products, have already scaled back their shale operations, which typically have a higher break-even price than conventional oil production. The cost of transporting crude to customers even exceeds its current value in some landlocked regions, meaning that a million barrels per day less is being pumped.
At the very least, the deal should provide some respite to the oil markets and act as a foundation for them to recover in the long term.