Oil prices were broadly higher during Monday’s Asian trading session after Russia and Saudi Arabia confirmed a new agreement for oil production cuts after days of intense negotiations. OPEC members and their allies, including Russia and Mexico announced on Sunday that they will be cutting production by 9.7 million barrels per day in May and June (10 percent), some of the steepest cuts ever agreed by global oil producers. By the end of June, the group will create a roadmap that will keep production levels down to some degree through April 2022. The new production cuts will be more than four times deeper than the previous production cut record which was set in 2008.
The agreement to cut production by 9.7 million barrels per day came after Mexico refused a proposal for a cut of 10 million barrels per day last Thursday. Mexican President Andres Manuel Lopez Obrador agreed on Friday that Mexico would reduce its output by 100,000 barrels per day, far less than originally proposed, with the understanding that the U.S. would cut production by 250,000 barrels per day to cover Mexico’s deficit. U.S. President Donald Trump did confirm that he had made a deal with Mexico, and that Mexico would repay the U.S. for its current cuts at a later time. Trump did not outline the specific details of the arrangement. “It’s a small amount for us, a large amount for Mexico,” Trump said in a Statement. He added in a tweet that the new production cuts will “save hundreds of thousands of energy jobs in the United States.”
Oil futures were up as of 1:27 p.m. HK/SIN, with Brent crude futures gaining 4.16 percent to $32.79 per barrel, and U.S. WTI futures up 4.44 percent to $23.77 per barrel. Gains were capped as analysts worried that the deal is simply too late, and that the past few weeks of overproduction and reduced demand have already created a supply glut and storage challenge. Some skeptics have also been quick to point out that some oil producers, including the U.S., haven’t yet signed a formal agreement to the production cuts, which leaves open the possibility that things may still change. Additionally, Russia has historically avoided full compliance with its production cuts, causing analysts to suggest that it will not comply fully this time around either. According to the terms of the new agreement, the bulk of the cuts will come from Russia and Saudi Arabia, both of which will cut 2.5 million barrels per day.
Analysts are also concerned that demand will continue to decline as countries extend their flight bans, and that the newly decreed cuts won’t take a further reduction in demand into account. Demand for oil has fallen by one-third since the coronavirus lockdowns began. Forecasts predict that demand will fall by some 18.5 million barrels per day, indicating that the current cuts of roughly half that will not be sufficient to prop up prices or solve the supply glut.