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OPEC+ deal won’t save Covid-19 crashed oil prices

DA NANG – Global oil markets received the price war truce they had long sought, but hopes for a significant and sustained rebound in prices are still likely misplaced.  

OPEC+, the group of oil producers led by Russia and Saudi Arabia, respectively the world’s second and third largest crude producers and top two exporters, reached a tentative agreement to trim oil production by 10 million barrels per day (bpd) to help ease the economic impact of the coronavirus crisis on global demand.

The group of producers will cut 10 million bpd worth of production in both May and June, then drop the cut to 8 million bpd for the rest of the year. Starting in January 2021, production cuts will drop to 6 million bpd and last until April 22, 2021.

The deal, as Asia Times reported, did not include other non-OPEC+ producers like the US, the largest global oil producer (at least for now), but OPEC kingpin Saudi Arabia called on other producers to also cut production.

The push by both Russia and Saudi Arabia to have the US join a production cut, however, may have been over played since oil prices are so far beneath most US shale producers’ breakeven production costs that around 3 to 4 million bpd of US production could go offline soon.

That will be bonus for troubled oil markets drowning in a glut of overproduction, but a whammy for the US energy sector, which is now expected to see massive layoffs at a time when unemployment claims are fast-rising due to the impact of the Covid-19 crisis.

The production-slashing deal only gave a brief respite for oil prices. In the past, a 10 million bpd oil production cut would have seen oil market bulls raging, but the day of the announcement, April 9, ended in a market tailspin.

After briefly spiking on the news, prices headed south again. Global oil benchmark Brent crude prices dipped 4.1% to close at US$31.48 per barrel. Prices for US oil benchmark West Texas Intermediate (WTI) crude also tanked by $2.33 per barrel, closing at an anemic $22.76, a precipitous 9.3% single-day decline.

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