Largest oil supply agreement in history

G20 backs largest oil supply agreement in history 

US and others throw weight behind Opec and Russia’s production cuts

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 The US and the G20 on Friday called on the world’s leading countries to take “all the necessary measures” to stabilise an energy industry devastated by the coronavirus pandemic, giving international backing to deep oil production cuts pledged by Opec and Russia.

 

 Oil demand has fallen by roughly a third as some of the world’s largest economies have, in effect, shut down to try to stop the spread of the virus, driving crude prices to their lowest level in 18 years and threatening millions of energy sector jobs and long-term damage to supplies.

 Early on Friday morning, Saudi Arabia-led Opec and Russia struck a deal to cut 10m barrels a day from global supply, the biggest supply reduction ever made as the producers moved to prop up the global oil market. 

 Confirmation of the deal was delayed by Mexico’s refusal to make large cuts to its own oil production, defying Saudi Arabia’s push to have all countries in the Opec+ alliance cut an equal share.  

 The US, Russia and Saudi Arabia, the world’s top three oil producers, all endorsed the agreement to cut production, with Donald Trump, US president, saying that the US would help Mexico “pick up some of the slack” to smooth the deal’s progress.

 The communique from the G20 meeting said members would “commit to take all the necessary and immediate measures to ensure energy market stability”. 

In a reference to the Opec deal, the communique “recognise[d] the commitment of some producers to stabilise energy markets”. An earlier draft of the communique had contained a pledge to do “whatever it takes” but this was removed in the final version. 

 Alexander Novak, Russian energy minister, told the G20 meeting that “the role of the G20 is to comprehensively support these efforts [undertaken by Opec+]”.

 Saudi Arabia’s crown prince Mohammed bin Salman spoke with Russian president Vladimir Putin on Friday evening, according to Saudi state media, saying they had reaffirmed the importance of co-operation between oil producers. 

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 The push for a supply agreement is the latest in a series of efforts by governments, central banks and international institutions to prop up the global economy in the face of the Covid-19 crisis, which is driving nations across the world into deep recession.

 Speaking at the emergency online meeting of G20 energy ministers on Friday, Fatih Birol of the International Energy Agency said the “shockwaves” of the virus had created the oil crash and threatened “global economic stability”. 

 “Nobody should harbour the idea that these measures provide a quick fix,” said Mr Birol, who leads the world’s top energy body. “[But] like the effect of confinement on the spread of Covid-19, actions to address the oil market imbalance will help lower the peak and flatten the curve.” 

 The G20’s implicit backing for the Opec deal, which aims to remove 10m barrels a day from the market, marks a diplomatic victory for Mr Trump, who had pressed Saudi Arabia, Opec’s most powerful member, and Russia to end a month-old price war that had exacerbated the crisis in energy markets. 

 He held talks with Prince Mohammed and Mr Putin on Thursday and Friday, having threatened tariffs on Saudi and Russian oil sales if they did not reach a deal. 

Mr Trump has not had to commit to any mandated cuts by the US. 

 Mexico’s reluctance to take on deeper cuts while its government has pledged to increase production was not thought likely to delay the Opec cuts agreement indefinitely. 

 This gigantic cut is dictated by an even bigger collapse in demand, forcing all of the world producers to collectively intervene in order to avoid a collapse of the oil industry Roger Diwan Kremlin spokesman Dmitry Peskov said on Friday that Mr Putin considered the deal to have been sealed. 

 Mr Trump indicated that the US may account for some of Mexico’s cuts through declines already under way in its own oil sector.  “The US will help Mexico along and they will reimburse us . . . at a later date when they are prepared to do so,” Mr Trump said.

 North American production is already falling because of the collapse of oil prices, but the US and Canada stopped short of committing to additional government-mandated curbs on supply, pointing instead to large-scale cuts to capital expenditure by private energy companies. 

 Dan Brouillette, US energy secretary, told the G20 that US oil production could be reduced by nearly 2m b/d this year, or at least 10 per cent of the country’s output. “This is a time for all nations to seriously examine what each can do to correct the supply/demand imbalance,” Mr Brouillette said.

 Roger Diwan at IHS Markit said the scale of the crisis had forced the US to at least offer support to potential supply cuts, despite Mr Trump’s own longstanding animosity towards Opec. He has frequently blamed it for trying to boost oil prices to the detriment of US motorists. “Reality and pragmatism has finally set in,” Mr Diwan said, adding that the supply deal was “about seven times bigger than the action taken during the 2008-09 financial crisis”. 

 “This gigantic cut is dictated by an even bigger collapse in demand, forcing all of the world producers to collectively intervene in order to avoid a collapse of the oil industry.”  

 Recommended FT CollectionsOil The oil price war Despite the G20 backing, doubts persist that the measures taken will be enough. Oversupply still threatens to max out storage facilities around the world within months, even if supply cuts have bought time. 

 That could potentially still force uncoordinated shutdowns of oilfields, which can cause long-term damage to reservoirs and future supplies. Oil traders are also sceptical about counting production cuts caused by lower prices as contributions towards lowering supply, given they would happen regardless of any deal. 

 Brent crude oil, the oil benchmark, initially rallied on Thursday before dropping almost 15 per cent from its peak, back to near $30 a barrel. It traded at $70 a barrel as recently as January, before collapsing to near $20 at the start of this month. 

Markets were closed on Friday for Easter. But an oil market in which the world’s most powerful energy producers are co-ordinating, at least to an extent, is widely seen as more stable than one left in freefall. “Even if poorly implemented, the agreement is substantial, and will make a difference to the market,” said Ann-Louise Hittle at Wood Mackenzie. 

 Additional reporting by Jude Webber in Mexico City and Demetri Sevastopulo in Washington DC