The world’s biggest oil producers have agreed to continue restraining production for two full years
MORE THAN one month after the onset of a bitter price war, the world’s biggest oil producers came to a truce. On April 12th the Organisation of the Petroleum Exporting Countries , led by Saudi Arabia, and its allies, led by Russia, said they would limit production by nearly 10m barrels a day from May through June, the largest cut ever. What is more, the countries said they would continue to restrain production, albeit less strictly, for two full years.
In the short term, the deal moves too slowly to make up for the sudden drop in oil demand. The OPEC+ agreement will take effect in May. Already, demand in April is expected to plunge by about 20m barrels a day. The deal could have a greater impact later this year. Supply would be constrained as demand starts to pick up, pushing prices higher. However two problems may arise.
The second problem is that supply cuts may not materialise at the level set out by OPEC, not to mention the level hoped for by Mr Trump—the president on April 13th said that the agreement aspires to cut production by 20m barrels a day, not 10m. That depends on the compliance of an unwieldy cast, including members of the OPEC alliance and other oil-producing member countries of the G20. Historically, they have shown little appetite for adhering to strict limits on output.
If oil remains cheap, then state-controlled companies outside America may chafe at production limits, which would be failing at their expressed purpose of raising prices. If prices rise, it seems possible that production in America will tick back up. That would undermine support for production limits within Russia and other members of the OPEC alliance, which would yet again find themselves ceding market share to American shale.
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