These surely are unprecedented times. What seemed to have been almost on the verge of collapse – was salvaged with Opec and allies agreed to cut oil production by over 12 million barrels per day (bpd). Opec Plus agreed to cut 9.7 million bpd – while the rest will be contributed by the likes of USA, Canada and Brazil. Mexico, came out as a clear winner, agreeing to cut only one-fourth of its quota at 0.1 million bpd.
It was just last month, when any chances of any deal, let alone a historic one as this, were out of question. Russia and Saudi Arabia had got out of a four-year long production freeze deal, as the Kingdom announced a full-blown price war, threatening to pump record oil levels. It did not last a full month, as the coronavirus impact on demand is beyond repair – and no producer, regardless of the size, can anymore afford business as usual.
What is also historic about the deal is that it spreads beyond the traditional players. The fact that the USA despite its antitrust laws has agreed to comply with the production cut, says a lot about the anxiety that there is out there among the producers. So, the oil supply will at least be lighter by a tenth of what it was last month – for at least a year, if not beyond.
Now that is five times bigger than the previous biggest production cut deal, that happened 12 years ago. Back then, the demand drop was big – yet quantifiable. This time around, it is definitely bigger, and unquantifiable. The global demand has already gone down by 30 percent since the virus outbreak. Surely, a 12-15 percent drop in supply does make a case for some correction.
But a lot of market experts view this deal as an attempt to save the market from a total crash like situation, where the prices were in real danger of entering the teens. The demand side continues to be weak, and with more than half the world under lockdown, and no vaccine in sight, no one knows how long that continues.
The equilibrium point is still far away even after the historical deal. At best, the deal should steer the oil markets away from the worst-case scenario. The 4-day long video conference has managed to broker a deal as inclusive as conceivable. The demand side is much of a bigger problem, and there is nothing much the producers can do about it. The likes of Goldman Sachs termed the deal as “too little too late”, maintaining that at best oil could “rise to $40/bbl” even after such an unprecedented move. Such are the times.