Global pact forged to drastically cut oil production to contain price crash

The OPEC cartel and other oil producers agreed Sunday to cut crude production by at least a tenth of global supply — an unprecedented move to stabilize the market.

Russian President Vladimir Putin, U.S. President Donald Trump and Saudi Arabia's King Salman all support the deal, which would see global crude output cut by 9.7 million barrels a day, the Kremlin said Sunday.

OPEC confirmed in a release the cuts will begin May 1 and continue until June 30. After that, the countries will keep gradually decreasing curbs on production until April 2022. From July until December of this year, output cuts will continue at 7.7 million bpd, and 5.8 million bpd for the 16 months after that.

The so-called OPEC+ countries agreed to have Mexico reduce its daily output by 100,000 barrels only for those two months, which had been a sticking point for the accord. The pact came after a marathon video conference between officials from 23 nations. The group will meet again in June to determine if further actions are needed.

OPEC+ said in a draft statement seen by Reuters effective oil output cuts could amount to more than 20 million bpd, or 20 per cent of global supply, if contributions from non-members, steeper voluntary cuts by some OPEC+ members and strategic stocks purchases were taken into account.

Global measures to slow the spread of the coronavirus have destroyed demand for fuel and driven down oil prices, straining budgets of oil producers. Consumption has dropped by an estimated 30 million bpd.

Trump had threatened OPEC leader Saudi Arabia with oil tariffs and other measures if it did not fix the market's oversupply problem. Low prices have put the U.S. oil industry, the world's largest, in severe distress.

Canada hasn't committed to specific cuts

OPEC+ has said it wanted producers outside the group, such as the United States, Canada, Brazil and Norway, to cut a further five per cent, or five million bpd. 

Canada and Norway had signalled their willingness to cut, but as of Friday, Natural Resources Minister Seamus O'Regan had said Canada had yet to promise any specific production cuts.

Alberta, Canada's biggest oil-producing region, "has already formerly curtailed 80,000 barrels per day," O'Regan said.

"This is good. We welcome any news that brings stability to global oil markets," O'Regan said in an emailed statement to CBC News Sunday.

"The federal government is deeply concerned about oil price instability and the impact on thousands of workers in Canada's energy sector, and their families. 

"Canada is committed to achieving price certainty and economic stability. We will keep working with provinces, businesses, labour, Indigenous communities and our international partners, including the G20."

A government source told CBC News Sunday that Canada has not committed to production cuts as that would fall under provincial jurisdiction.

Deal won't turn market around, economist says

Concordia University economics professor Moshe Lander said while the news should in theory be good for Canadian producers, "the proof is in the pudding."

"I think that markets in general are usually pretty suspicious of OPEC announcements unless there's a clear announcement of enforcement and consequences for noncompliance," he said. "Maybe when markets open on Tuesday you might see oil prices jump a little bit.

"I don't think that this is going to turn the market around."

Kevin Birn, an analyst with IHS Markit in Calgary, said though the scale and scope of the deal was unprecedented, it is not a sufficient solution to ongoing demand shock brought on by COVID-19.

"What it will potentially do is stave off the lowest potential price that we could've seen," he said. "Of course, the outcome of this remains to be seen in how well the producers adhere to it themselves, which has always been a traditional problem of any of these deals."

Additional volumes will still have to come off during this period, Birn said, implying there is still a tough road ahead for producers around the world and in Western Canada.

"I think it's reasonable that we will see some movement on price coming out of the other side of this when the markets open, some optimism," he said. "But I would caution being too excited about this. We still have a larger issue."

The United States, where legislation makes it hard to act in tandem with cartels such as OPEC, said its output would fall steeply by itself this year due to low prices.

Mexico had initially blocked the deal but its president, Andres Manuel Lopez Obrador, had said Friday that he had agreed with Trump that the U.S. will compensate what Mexico cannot add to the proposed cuts.

"The United States will help Mexico along and they'll reimburse us sometime at later date when they're prepared to do so," Trump said at a White House press briefing Friday.

'Economic conditions continue to worsen'

Karl Schamotta, chief market strategist at Cambridge Global Payments in Toronto, said in a release that while the deal was historic, challenges remain — such as the capacity of storage facilities before the deal begins, and questions about what enforcement mechanisms will apply to nations who renege on the agreement. 

"Perhaps most importantly, economic conditions continue to worsen on a global basis, with shutdowns extending, trade flatlining, and unemployment levels surging to historic levels. Demand declines may outpace any production cuts, leaving storage facilities to continue filling," he wrote.

A 15 per cent cut in supply might not be enough to arrest the global price decline, banks Goldman Sachs and UBS predicted last week, saying Brent prices would fall back to $20 US per barrel from $32 at the moment, and $70 at the start of the year.

As Asian markets reopened Monday local time, West Texas Intermediate crude was trading at $22 US per barrel.

Alberta Premier Jason Kenney said on Twitter Sunday that while there are challenging months ahead, the deal puts the sector on a path to recovery.

"We are glad to see sanity return to global oil markets. As I have said, OPEC+ started the fire, and it was their responsibility to put it out," he wrote.

A spokesperson for Alberta Energy Minister Sonya Savage referred CBC News to a Friday statement, saying the minister was cautiously pleased by the deal.

"The agreement to implement production limits by OPEC+ brings global energy producers in line with measures that Alberta has reluctantly taken since January 2019," she said

"However, demand will return as economies around the globe recover from this pandemic. Life will return to normal. In the interim, we hope that the measures taken by OPEC+ will stabilize the global price of oil and prevent further stress to energy workers in Alberta."