After Years of Bickering a Meaningless OPEC Deal Reached

Mish

OPEC and other energy producers have finally reached a deal to reduce production. What's next?

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

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 but crude futures are down.

Same with stock market futures.

Mike "Mish" Shedlock

Comments (28)
No. 1-12
Dubronik
Dubronik

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...

wootendw
wootendw

"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.

Tony Bennett
Tony Bennett

"What's next?"

...

Cheating

Six000mileyear
Six000mileyear

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.

tokidoki
tokidoki

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.

davebarnes
davebarnes

Trump lied.
He promised me low gasoline (motor fuel) prices.
No reason to buy that F-250 now.

Quatloo
Quatloo

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.

Maximus_Minimus
Maximus_Minimus

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.

Lance Manly
Lance Manly

Sub $45 oil is still a looser in shale. Really to make any real money you need $60

Greggg
Greggg

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.

marcus skeptus
marcus skeptus

What happens to the frackers when the world runs out of oil storage?

frozeninthenorth
frozeninthenorth

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


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