The agreement to cut global crude oil output, reached amid high drama over the Easter weekend, appears effectively to be in two parts. A short-term agreement that's probably not enough, and a longer-term plan that has a much better chance of success.
LAUNCESTON, Australia - The agreement to cut global crude oil output, reached amid high drama over the Easter weekend, appears effectively to be in two parts. A short-term agreement that’s probably not enough, and a longer-term plan that has a much better chance of success.
While there is little doubt the deal is significant, it’s worth noting it was reached in response to a global economic crisis unprecedented in its scale and in the speed at which it has hit the world economy. This may be somewhat optimistic because if the output deal has the desired effect of stabilising and even increasing prices, the incentive for the other producers, who operate largely in free-market economies, to trim output is lessened.
The main point, though, is that even if the optimistic view of a total cut of 20 million bpd comes to fruition, it’s still not enough to offset the demand shock from the coronavirus. The formal 9.7 million-bpd cut is also only for May and June, a move that assumes a fairly optimistic view on how quickly countries will emerge from economic hibernation.
If OPEC+ can actually deliver on the deal, this will make a balanced market more likely to appear once the coronavirus pandemic is contained.
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