Oil drops as OPEC agrees on massive oil supply cut to offset virus impact; awaits Russia’s approval

The 14-member group, led by Saudi Arabia, decided on Thursday to cut production by 1.5 million barrels per day (bpd) through the second quarter of the year.

OPEC added the group would review this policy at its next meeting on June 9.

The proposed cuts, which were at the top end of analyst expectations, are believed to be conditional on approval from Russia.

It means energy market participants will now turn their attention to a meeting of both OPEC and non-OPEC members, sometimes referred to as OPEC+, on Friday.

Ahead of the OPEC+ meeting, analysts were concerned a long-standing energy alliance between Saudi Arabia and Russia would come under intense scrutiny.

That’s because Russia’s appetite for deeper production cuts has been far from certain in recent weeks. Moscow is reportedly in favor of an extension to the current level of cuts rather than a further reduction.

Oil prices reversed early gains to move lower on Thursday. International benchmark Brent crude fell below the key $50 level, sliding 2.4% to $49.93, while U.S. West Texas Intermediate fell 88 cents, or 1.88%, to settle at $45.90 per barrel.

Speaking shortly after the OPEC meeting on Thursday, Iranian Oil Minister Bijan Zanganeh said that Tehran would remain exempt from the proposed reduction.

How did we get here?

OPEC and non-OPEC producers first committed to curtailing their collective oil production policy back in 2016 in an effort to bolster prices, with the deal coming into force in January 2017.

In December 2019, it was extended and the alliance agreed to curb oil output by approximately 1.7 million barrels per day. Saudi Arabia then opted to cut its own production voluntarily by an additional 400,000 b/d for three months, should fellow members stick to their commitments.

In February, OPEC’s joint technical committee (JTC) reportedly recommended a 600,000 bpd reduction in oil production, and an extension of the cuts to end-2020, to alleviate downward pressure on oil prices. 

Russia said at the time that it had not yet decided whether to sign up to the additional cuts, however, and that position appears to have continued.