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Coronavirus pandemic
Opinion
SCMP Editorial
SCMP Editorial

Opinion | Parties must honour cuts if oil deal is to bring some relief

  • Agreement has been welcomed by world facing recession in the wake of the coronavirus crisis, but its effectiveness remains to be seen

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Demand for oil continues to fall due to the new coronavirus outbreak. Photo: AP
SCMP Editorial
A world facing recession needed something to snap a run of bad news. It remains to be seen whether a deal to cut oil production in an attempt to end a damaging price war that could further destabilise financial markets will make much difference. To be sure, it is the biggest production cut ever negotiated. The joint effort by the United States, Russia and Saudi Arabia, de facto leader of the wider Opec-plus oil producer group, which delivered the agreement was unprecedented. But the superlatives pale against daunting numbers. After the coronavirus pandemic pushed crude prices to 18-year lows, news that the US had reported its biggest weekly inventory build kept them there, with global demand expected to fall to 25-year lows.

The deal aims to slash global oil output by nearly 10 million barrels a day, or nearly 10 per cent, in May and June, by nearly 8 million for the rest of the year and then nearly 6 million to April 2022. Bigger cuts by Saudi Arabia and its Gulf allies to reflect recent accelerated production could push the tally past 12 million barrels a day. Contributions from other producers including the US, driven by weak prices, may push the cuts even higher, towards 20 million. The agreed cuts are double those since the global financial crisis more than a decade ago. They end a price war between Saudi Arabia, and Russia, which broke out last month after the latter refused to sign up to more modest cuts.

But the pandemic has slashed demand by 35 per cent, against pre-crisis global production of about 100 million barrels a day. So it is not clear whether the deal can help prices recover and what it means for the future of the oil industry. Low oil prices are usually good for demand, which is now hard to find amid curbs on travel and normal economic activity.

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The slump is equivalent to Opec’s entire output. The effectiveness of the deal also depends on whether the markets believe producers will fully honour their cuts, especially if prices rise, with Russia for one not having a perfect compliance record. The price war created an election-year political dilemma for US President Donald Trump, who until recently called for more production to push petrol prices lower, and now wants less to push crude prices higher. This is to save thousands of jobs in states he must win for re-election as the US oil industry, particularly the shale sector, scales back operations in the face of falling demand.

In the short term, the deal is a relief to struggling Middle Eastern and African economies and global oil companies, including American firms that directly and indirectly employ 10 million workers. Hopefully it will lead to at least temporary relief for the energy industry and the global economy.

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