Oil prices moved higher early Monday morning stateside after OPEC and its allies agreed to cut production by 9.7 million barrels per day. The deal, which was finalized on Sunday after marathon discussions that spanned four days, is the single largest output cut in history.
The group, known as OPEC+, initially proposed cutting production by 10 million barrels per day — amounting to some 10 percent of global oil supply — on Thursday, but Mexico opposed the amount it was being asked to cut, holding up the final deal. Under the new agreement, Mexico will cut 100,000 barrels per day, instead of its initial allocation of 400,000 barrels per day.
“Unprecedented measures for unprecedented times,” Ed Morse, Citi’s global head of commodities, wrote in a note to clients on Sunday. Morse said the cut will have a significant impact in the second half of the year and help lift prices to the mid-$40s by year-end, but that there will be short-term pain while the market rebalances.
“It’s simply too late to prevent a super-large inventory build of over one billion barrels between mid-March and late May and to stop spot prices from falling into single digits,” he said.
U.S. West Texas Intermediate crude rose 2.24 percent to trade at $23.27 per barrel, while international benchmark Brent crude gaining 1.24 percent to $31.87 per barrel. Earlier in the session WTI rose as much as 8 percent, but also traded in negative territory at one point in a volatile session.
The 9.7 million barrels per day cut will begin on May 1, and will extend through the end of June. The cuts will then taper to 7.7 million barrels per day from July through the end of 2020, and 5.8 million barrels per day from Jan. 2021 through April 2022. The 23-nation group will meet again on June 10 to determine if further action is needed.
On Thursday WTI crude dropped more than 9 percent as traders feared the cut wouldn’t be big enough to combat the fall off in demand caused by the coronavirus pandemic. For the year WTI is down 62 percent, while Brent has shed 52 percent. The market was closed on Friday.
“This is at least a temporary relief for the energy industry and for the global economy,” Rystad Energy’s head of analysis Per Magnus Nysveen told CNBC in an email.
“Even though the production cuts are smaller than what the market needed and only postpone the stock building constraints problem, the worst is for now avoided.”
President Donald Trump, who was heavily involved in brokering a deal between Saudi Arabia and Russia after a price war broke out between the two countries, cheered the agreement saying in a tweet that it’s a “great deal for all.”
“This will save hundreds of thousands of energy jobs in the United States,” he added.
