In April of this fateful pandemic inflicted year Organisation of Petroleum Exporting Countries and its allies signed an agreement to contain the damage that COVID had done to the global oil export market. The pandemic which resulted in heavy imposition of lockdowns around the world resulting in reduced human mobility and consumption gave rise to a dramatic dip in the demand for oil globally. Global oil demand is estimated to have fallen by a third as more than three billion people are locked down in their homes due to the coronavirus outbreak. Applying conventional economic principles of demand, and price with a constant supply resulted in an exponential fall in oil prices around the world. In the United States alone, the oil prices fell to an all time negative in April of this year.
With the global powers such as the United States, its OPEC allies, Russian Federation, and other oil producing countries getting inflicted by the public health crisis, the oil price war was another of the economic woes these developed countries began to face. The fall in oil prices resulted in a cut throat price war between Saudi Arabia and the Russian Federation, this instilled a fear of widespread price war between the major countries in the recovery phase of the global economy. As the principles of Game Theory rightfully suggest, a price war will only result in the finite player from the game to drop out, and in the process the payoffs that the winner could receive are considerably lower in relative comparison to cooperated response.
Sensing the same OPEC+ countries decided to take the higher road by cooperating with one another on the good old principles of good faith and global development. After a week-long marathon of bilateral calls and four days of video conferences in early April with government ministers from around the world -- including the OPEC+ alliance and the Group of 20 nations -- an agreement finally emerged to tackle the impact of the global pandemic on demand. The agreement was finalised with the OPEC+ agreeing to cut 9.7 million barrels a day -- just below the initial proposal of 10 million. The U.S, Brazil, and Canada agreed to contribute another 3.7 million barrels on paper as their production declines.
The historic deal was brokered by President Trump with his Russian counterpart President Putin, and Saudi King Salman, where Trump negotiated with Mexico that was resisting the deal earlier, and scored a massive diplomatic victory for the United States as well.
“We want to regain the stability of the oil market,” Prince Abdulaziz said.
This deal gave a massive impetus to oil trade around the globe as the crude prices doubled across the last two months, and this was made possible by cutting 10% of global oil supplies. The success of this deal has encouraged the OPEC+ countries to extend these cuts for another month as the world has not been successful to create enough oil demand such that production to the earlier capabilities is made possible without inflicting a price war between the nations.
The historical April deal amongst OPEC+ countries cut the oil supply by 9.7 million barrels per day (bpd), and the deal was supposed to taper down these cuts to 7.7 million bpd from July to December.
“Demand is returning as big oil-consuming economies emerge from pandemic lockdown. But we are not out of the woods yet and challenges ahead remain,” the Saudi energy minister, Prince Abdulaziz bin Salman said.
With the lockdowns easing, and OPEC already housing an excess of 1 Billion barrels of oil, signing the agreement to extend the cuts from the previous months to July would be extremely beneficial to the OPEC countries. This extension in cuts will result in OPEC being able to reduce its inventories rate at 3 million to 4 million bpd in the months of July and August. This would help the OPEC+ countries in maintaining fair prices without any excess oil barrels in their inventories following August when the global oil demand is expected to rise rapidly.
Amidst the same negotiations the OPEC+ countries did not shy away from making their displeasures with Nigeria and Iraq known for exceeding their respective production quotas in May and June. OPEC’s data shows that in relative comparison to Nigeria, Angola, Kazakhstan, and Russia which exceeded their production by approximately 150,000 bpd, Iraq produced a whooping 520,000 bpd above its quota. With both Nigeria and Iraq agreeing to extra cuts in order to compensate for exceeding the production quotas in the previous months, the compliance of the same from Iraq remains questionable.
Global leaders have been extremely happy about the OPEC+ reaching this agreement as it has stabilized the oil market while also serving as a testament to the world’s ability to negotiate and formulate diplomatic solutions without resorting to worse measures such as a price war. With the OPEC+ joint ministerial monitoring committee meeting being scheduled for every month until December, this committee reviews the market, compliance to the deal, and recommends cuts. OPEC and OPEC+ will hold their meetings at the end of November, and the deal would be renegotiated taking into consideration the then economic realities of the world.
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