OPEC+ clinches output deal, Russia and Saudi end price war

(Sharecast News) - The Organisation of Petroleum Exporting Countries and its key allies managed to pull a rabbit out of the hat at the last minute - defying skeptics.
After a week of marathon talks, on Sunday the cartel of oil producing countries, which together with Russia and Kazhakstan are known as OPEC+, announced that its members would reduce their combined output by 9.7m barrels a day.

Nonetheless, some traders voiced skepticism regarding the deal's effectiveness in propping up crude oil prices, especially in the very near-term.

While the production curbs would slice about 10% from total global supplies, some estimates pointed to a 20-30% drop in world oil demand as a result of the Covid-19 pandemic, although expectations were for a rebound in demand starting from the third quarter of 2020.

Key to the deal, other producers from outside of OPEC+ would also support the deal, including the US, Brazil and Canada, which would contribute another 3.7m b/d a in cuts, as their own production declines in response to weakness in demand.

Initial reports also indicated that other G-20 oil producers might also contribute additional reductions, but OPEC+ went ahead without any details having yet been put in place.

Indeed, at one point the negotiations appeared set to fall apart after Mexico balked at cutting its oil output by the 400,000 b/d that resulted from its production quota as an OPEC member.

Instead, the North American nation said it would reduce output by 100,000 b/d with Washington making up for the remainder.

Furthermore, Sunday's deal also meant that for the moment at least, Moscow and Riyadh had buried the hatchet, putting an end to their oil price war.

According to Edward Moya, senior market analyst at Oanda, the deal that was announced on Sunday fell short of the 20.0m b/d output cut that some in markets had been hoping for.

Moya also took issue with the fact that the contribution from the US would take the form of 'natural' declines in production in response to lower demand.

"The number of holes in this production cut deal will make it hard for anyone feel confident that a firm bottom is in place," he said.

"Oil prices should remain heavy in the short-term, but that could quickly change if optimism grows that the US and Europe could see major parts of their economy opening by June.

"For now, the demand outlook remains bleak, but these production cuts could support the argument that energy markets could see an implied stock draw in the second half of the year.

"There will be a time to eventually turn bullish on oil, but for now WTI crude prices could continue to show signs of stabilizing in the mid-$20s."