Saudi Arabia and Russia ended their oil price war on Sunday by finalising a deal to make the biggest oil production cuts in history, following pressure from US President Donald Trump to support an energy sector ravaged by the coronavirus pandemic.
Opec producers said the cuts deal would in total remove around a fifth of global oil supply, although this would include declines forced on other producers, like those in the battered US shale sector, by the recent oil price collapse.
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Even without the volumes to be contributed by those countries, the cuts announced by Opec on Sunday evening of 9.7m barrels a day are more than double those made by the cartel during the global financial crisis.
Mr Trump immediately welcomed the announcement, saying it would protect American jobs, just hours before oil markets were due to reopen after Easter weekend.
The agreement by the Opec+ group, first brokered on Thursday, was backed by the US and G20 on Friday but had threatened to unravel after Mexico — a relatively small oil producer — angered Saudi Arabia by seeking an exemption from the deal.
But following US pressure and prolonged negotiations, Saudi Arabia conceded the point, allowing Mexico to cut by a smaller margin than its Opec+ peers. That resulted in the overall curbs from the Opec+ group amounting to 9.7m b/d, slightly less than the 10m b/d initially pledged, or roughly 10 per cent of pre-crisis demand.
The cuts will begin in May for two months and then diminish in size before expiring in April 2022. The cartel's big Gulf producers, Saudi Arabia, the United Arab Emirates and Kuwait, will deepen their own cuts, adding to the total.
The inclusion of declines by non-Opec producers in the total cuts — for an aggregate close to 20m b/d, or nearly 20 per cent of global supply — may not reassure traders that have tried to weigh the loss of up to 30 per cent of global demand as economies have shut down to slow the spread of the coronavirus.
The deal, while historic for its size alone, also marks a startling pivot for Mr Trump, a frequent critic of Opec in the past, who pushed the cartel to make cuts designed to support oil prices. Mr Trump has previously blamed Opec for raising fuel prices for the average US consumer.
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"The big Oil Deal with Opec Plus is done," Mr Trump said on Twitter on Sunday. "This will save hundreds of thousands of energy jobs in the United States. I would like to thank and congratulate President Putin of Russia and King Salman of Saudi Arabia. I just spoke to them from the Oval Office. Great deal for all!"
Mr Trump had pressed Saudi Arabia's Crown Prince Mohammed bin Salman and President Vladimir Putin of Russia over recent days to secure the deal — and even last week disclosed the size to be agreed. For Mr Putin it has provided not only a likely boost to Russia's economy but a new forum for ties to the US president.
The Kremlin said Mr Trump and Mr Putin also spoke separately on Sunday.
"Under the watchful eye of Donald Trump, Saudi Arabia seemingly had to relax their position that everyone cuts by equal proportion," said Helima Croft at RBC Capital Markets. "Trump essentially became the de facto Opec president."
On Saturday, US senators from oil-producing states held heated calls with Saudi officials including Prince Abdulaziz bin Salman, the energy minister, and threatened to "re-evaluate" the US relationship with the kingdom.
"Washington's centrality to today's deal closing may mark a de facto Opec+ expansion and a further step in a global shift towards managed markets," said Kevin Book of Clearview Energy Partners in Washington.
G20 nations such as the US, Canada and Brazil offered rhetorical support to the deal but, in the end, were not required to make official commitments to cut — another diplomatic victory for the US, where collaboration with Opec would have been politically awkward.
But these producers will shed supply anyway as weak oil prices force oil companies to reduce capital spending. US production could still fall by as much as a quarter, or 3m b/d, if the cuts deal boosts oil prices to $35 a barrel, said Scott Sheffield, head of Pioneer Natural Resources, a large shale producer.
The Opec+ cuts deal marks the latest in a series of efforts by governments and international institutions to support the global economy in the face of the Covid-19 crisis, which threatens to drive countries across the world into deep recession.
It is not yet clear whether the deal will be enough to support the oil market. Traders have said co-operation by producers removes the fear of a market in freefall but storage capacity could still become overwhelmed in the coming weeks, depending on how long lockdowns and other measures last.
Oil prices fell on Thursday after the initial outline of the deal was made public but have been supported above an 18-year low since plans for deep cuts came to light two weeks ago. Brent crude has recovered from near $20 a barrel to trade above $30 last week.
Saudi Arabia is expected to raise its crude export prices on Monday after dramatically slashing them last month.
Prince Abdulaziz, the half-brother of Crown Prince Mohammed, applauded the deal after climbing down from stand-off with his Mexican counterpart, Rocío Nahle.
According to a video from the virtual conference seen by the Financial Times, Ms Nahle asked the crown prince whether he "agreed to these terms" as the group moved towards finalising the deal.
"I go with the consensus," Prince Abdulaziz said, before starting to applaud.
- Additional reporting by Henry Foy in Moscow and Jude Webber in Mexico City.
Written by: Derek Brower, Anjli Raval and David Sheppard
© Financial Times 2020