OPEC and other oil producers reached an Unprecedented Oil Deal that will cut production close to 10 million barrels a day.
Saudi Arabia, Russia and the U.S. have agreed to lead a multinational coalition in major oil-production cuts after a drop in demand due to the coronavirus crisis and a month-long Saudi-Russian feud had devastated oil prices. The deal, sealed Sunday, came after President Trump intervened to help resolve a Saudi-Mexico standoff that jeopardized the broader pact.
As part of the deal, 23 countries committed to collectively withhold 9.7 million barrels a day of oil from global markets. The unprecedented agreement is designed to address a mounting oil glut resulting from the pandemic’s erosion of oil demand.
Under the final deal announced Sunday, Mexico will cut 100,000 barrels a day of output, some 250,000 barrels fewer than Saudi Arabia initially wanted. The U.S. unlocked the standoff by pledging to compensate the Mexican amount with 300,000 barrels of reductions of its own, the delegates were told.
It remains unclear how the U.S. cuts would be carried out. Participants were also told the U.S., Canada and Brazil will hold back as much as 3.7 million barrels a day but some of the reductions will be market-driven losses.
Trump Joins the Cartel
For decades, Mr. Trump has been a vociferous opponent of the cartel, deeming its efforts an evil force that squeezed American motorists. But the price war between Saudi Arabia and Russia threatened a vibrant U.S. oil industry and led to what seemed to be a change of heart.
But in addition to prodding both sides into an agreement, the U.S. has also warned it would retaliate if Saudi Arabia didn’t turn off the spigots. On April 4, U.S. Mr. Trump threatened to impose tariffs on crude imports if he has to “protect” U.S. energy workers from an oil flood from producers such as Saudi Arabia.
Deal Won’t Last
This deal won’t last.
Trump will soon get angry that the US is cutting more than its fair share.
Art of the Deal
https://twitter.com/QTRResearch/status/1249396850047713280
The Saudis blew up a deal last month over meaningless production from tiny Angola.
The Saudi price demanded uniform cuts across the board. Letting the US stand in for Mexico will aslo annoy the Saudis.
We have a deal, but eventually someone cheats. And there is perpetual mistrust even if no one cheats. That’s why cartels break up.
Moreover, I strongly question if 10 million barrels is even enough to do much more than stabilize the price at some low level.
Futures Now Open
It took 4 minutes
Oil just dipped into the red— Mike “Mish” Shedlock (@MishGEA) April 12, 2020
It took 4 minutes but crude futures are down.
Same with stock market futures.
Mike “Mish” Shedlock
Mish considering what SA did today, it seems that the “agreement” lasted all of 48 hours with SA already offering discount on its oil price. Big surprise! Trying to keep the price of a commodity that is currently in glut phase is a waste of time and energy, there is too much incentive to cheat
What happens to the frackers when the world runs out of oil storage?
They take a break. If the break is long enough, they find other jobs until they can get their oil jobs back.
The kind of guys getting jobs at the frac sites, aren’t the kind who have trouble finding employment. As opposed to collecting rent and running hedge funds, banks, private equity, venture capital and governments in the age of central banks, their job actually takes some modicum of skills, brains, aptitude and effort.
How long until the fracking bonds puke is the only question left. Russia and the Saudis can afford to keep this up for years… and will. Cartels plot against their customers and against each other.
Sub $45 oil is still a looser in shale. Really to make any real money you need $60
The deal is good in a sense that it phases in the market driven reductions that would have taken place anyway. The key is US shale, and Canadian tar sands. None can operate with these rock bottom prices, and would have to shut down.
And in a true capitalist society – what is the problem??? That is how the law of supply and demand works.
I think the Saudis used the disagreement with Russia to flood the market with cheap oil, which they know will help destroy much of the US alternative oil production that relies on higher prices (at least $40 a barrel) to make a profit. They certainly would also like to see the electric car industry grind to a halt—absent government subsidies they can’t possibly compete with gas engine cars, at least with oil priced as low as it is today—but covid is ensuring no one is buying new cars at all. They are making peace with Trump now, but they probably know the deal will blow up soon.
“…help destroy much of the US alternative oil production….”
Put on hold. Not destroy.
OTOH, if Covid slows global trade and transport down significantly for any duration, there’s no market for oil producers with operating costs north of $40-50/barrel regardless.
Some of the shale producers may be able to survive on more captive natural gas alone, and can make a case for continuing to produce whatever oil goes with it. But not at the kind of scale of the last decade.
Corollarily, US gas consumers may have to get used to pay production cost as well, rather than enjoying gas flooding the market as a result of oil activities. If there is any long term “destroying” of US industry being planned by the Saudis and Russians, it is more likely related to them being annoyed that all the gas and energy consuming chemical and process industries, which their elaborate diversify-their economies-away-from-oil plans are built around, are currently busy relocating to dirt-cheap shale gas US instead.
As opposed to shale wells, big chemical and process plants are much more permanent once they are up and running.
It seems like the Russians were more interested in destroying the flow of money from the junk bonds that back the US fracking production. It would be Putin’s retaliation against US attempts to keep Russian gas and oil out of Europe trying to entice to the EU to buy US gas LNG.
Trump lied.
He promised me low gasoline (motor fuel) prices.
No reason to buy that F-250 now.
Without that truck, you will never be a man.
Don’t worry. Once Israel invades Iran, oil price will go sky high, but the US economy will crash. Won’t stop the Israelis though.
Ironically, the more oil that remains in US ground, the less compromised the country will be. It’s similar to rare wine. As soon as someone drinks one of the last 10 bottles in the world, the remaining 9 go up in value.
Deferred gratification means nothing to a nation of toddlers.
“What’s next?”
…
Cheating
“Trump will soon get angry that the US is cutting more than its fair share.”
Trump likes tariffs so I expect he will try one. It will probably have a variable rate that attempts to keep the price in the $35-$45/bbl range to US refiners. There might be offsetting cuts elsewhere so it won’t look like he’s raising taxes.
The OPEC countries probably could destroy most the US oil industry if they really wanted to.
That proofs that Mexico draw a hard bargain….I bet that the Saudis are calling Jiha on Mexico. Russia must be laughing at the whole thing and the Clown in the Whitehouse…well, he finally will start getting his hot cheetos, chimichangas, avocados…