Moscow (CNSNews.com) – Russia and Saudi Arabia have reached a tentative agreement to end a month-long oil price war that has caused global oil prices to plummet and threatened to force many U.S. shale producers out of business.
The deal was announced on Thursday following a video conference by OPEC+, a coalition of 24 Organization of the Petroleum Exporting Countries and other oil-producing nations. The group pledged to cut oil production by ten million barrels per day in May and June; by eight million bpd from July to January 2021; and by six million bpd from then until April 2022.
Mexican objections to the proposed deal pose a hurdle, however. Energy ministers from the G20 countries are due to hold a video conference on Friday.
President Trump on Thursday evening praised the proposed Russian-Saudi oil pact as a “very acceptable agreement.” He was speaking shortly after holding a conference call with Russian President Vladimir Putin and Saudi Crown Prince Mohammed bin Salman.
Despite the tentative deal, oil prices tumbled again on Thursday after briefly rallying in the days leading up to the OPEC+ conference. The U.S. West Texas Intermediate benchmark declined 9.29 percent to $22.76 per barrel. The Brent crude benchmark fell 4.14 percent, to $31.48 per barrel.
Although the agreement marks the biggest oil production cut in history, it still falls considerably short of the expected drop in global oil demand as a result of the coronavirus pandemic. The International Energy Agency forecasts a 35 million bpd drop in demand for oil this quarter.
Over the past several years, Russia and Saudi Arabia have worked together through the OPEC+ framework to keep global oil prices high. The partnership collapsed last month due to tensions over how to respond to the falling demand brought about by the pandemic.
Riyadh had advocated for production cuts of 1.5 million barrels per day, but Moscow rebuffed the proposal as premature.
In response, Saudi Arabia ramped up its oil production to a record 12 million barrels per day and cut prices in a bid to flood the market.
Although Russia and Saudi Arabia were the main combatants in the price war, U.S. shale producers also found themselves in the crosshairs. The United States has over the past decade emerged as the world’s largest oil producer, a development troubling to both Russia and Saudi Arabia.
“Both Russia and the major OPEC producers have been openly annoyed with the refusal of the U.S. producers to participate in past production cuts and the fact that the U.S. industry has been the major beneficiary of the price support mechanisms,” said Chris Weafer, chief executive at the Macro Advisory consulting firm.
“It is a stretch to say that Moscow and Riyadh are in any sort of cooperation to try and reduce U.S. oil production, the body language at the last [OPEC+] meeting strongly suggested otherwise,” Weafer said.
“But if a price war results in some U.S. casualties and a greater reluctance by investors and lenders to fund future U.S. marginal production, then Moscow and OPEC will be relieved.”
The collapse in global oil price has threatened to drive many U.S. producers out of business. Fitch Ratings has warned that with a continuing fall in oil prices this year U.S. shale drillers could default on more than $32 billion worth of debt, representing 17 percent of outstanding debt in the sector.
On April 1, Denver-based Whiting Petroleum Corp. became the first major U.S. shale driller to file for bankruptcy as a result of the price war.
In the lead up to Thursday’s agreement, Trump publicly urged Russia and Saudi Arabia to cut their oil production, warning that a failure to do so could result in U.S. tariffs.
“I am a big believer in our great energy business, and we’re going to take care of our energy business,” he said during a briefing on Saturday. “And if I have to do tariffs on oil coming from outside, or if I have to do something to protect – or thousands and tens of thousands of energy workers, and our great companies that produce all these jobs – I’ll do whatever I have to do.”