Opec finally comes up with the deal, and the oil markets are delighted. Image Credit: Reuters

London: Oil surged as the world’s top producers agreed on a framework for a deal to curb output.

Brent futures jumped more than 10 per cent as Saudi Arabia and Russia overcame their conflicts and reached an outline of an agreement. Saudi Arabia and Russia had been disagreeing over the baseline for OPEC+ oil-production cuts, with the kingdom insisting that reductions should be measured against April output.

The OPEC+ meeting Thursday is discussing curbing output by 10 million barrels a day, said Algeria’s energy minister, who holds OPEC’s rotating presidency.

Decisions at the online gathering will form the basis of Friday’s discussions on further contributions from G-20 nations, with US involvement seen as key.

Deepest cuts ever

OPEC and other oil nations held talks on Thursday on record production cuts of up to 20 million barrels per day, equivalent to about 20 per cent of global supplies, to support prices hammered by the coronavirus crisis.

Talks have been complicated by frictions between OPEC leader Saudi Arabia and non-OPEC Russia, but OPEC and Russian sources said they had managed to overcome differences.

“That is a global deal,” one OPEC source said, without specifying whether it would involve the participation of the US, something Russia and OPEC producers have insisted on.

Global fuel demand has plunged as much as 30 million bpd, 30 per cent of global supplies, as measures to fight the coronavirus have grounded aircraft, reduced vehicle usage and curbed economic activity.

Benchmark Brent oil prices hit an 18-year low last month and are trading around $35 a barrel, almost half their level at the end of 2019, dealing a severe blow to budgets of oil producing nations and high-cost US shale oil industry.

US President Donald Trump said last week a deal he had brokered with Saudi Arabia and Russia could lead to cuts of 10 million to 15 million bpd, even that figure, lower than the one cited by sources on Thursday, was unprecedented.

The biggest one-off cut previously agreed by OPEC alone was 2.2 million bpd during the 2008 financial crisis. OPEC sources have also indicated such a big cut was possible, if the US joined in. But Washington has yet to show it is ready to take part.

Cuts are an imperative

Major producers are scrambling for a deal as energy consumption has plummeted and hammered prices. Oil demand in India has collapsed by as much as 70 per cent and some American refineries face closure as consumption fell to the lowest in at least three decades. Producers will need to agree on a deep and prolonged supply cut, or risk crude falling back again.

“The market is already pricing in a deal,” said Amrita Sen, chief oil analyst at Energy Aspects. “Once the dust settles the demand declines are still bigger than the supply shortfall.”

While the anticipation of a production agreement has pushed prices slightly higher, WTI crude is still down more than 55 per cent this year. That is giving India an opportunity to bolster its strategic reserves, while South Korea has said it will expand its storage this year.

OPEC and its allies, and the G-20, face a huge task in trying to drain the large oversupply. But there are signs that the market is banking on improved balances down the line. Volatility for the second-half of 2020 has fallen sharply in recent days, indicating that the market has faith in OPEC+ restoring price stability, brokerage Marex Spectron wrote in a report.