The world’s largest producers (OPEC+ and the G20) have reached a historic agreement by pledging to cut global oil production by around 10% and thus ending the price war between Russia and Saudi Arabia.
The parties involved in the agreement include OPEC + and the G20 signed to attack the global impact of the COVID-19 pandemic. The agreement was close to failure due to the resistance imposed by Mexico, however, the mediation of the President of the United States and his brokerage between Russia and Saudi Arabia were decisive for its materialization, says Ed More of Citigroup Commodities research.
OPEC + will reduce production by 9.7 million barrels a day, slightly less than the initial proposal of 10 million. The United States, Brazil, and Canada will be responsible for reducing by 3.7 million barrels. In parallel, the G20 is expected to make a reduction and not simply represent idle production due to market forces.
Mexico won the diplomatic negotiation by reducing its production by 100,000 barrels, much less than its prorated share.
According to Bloomberg, with the virus paralyzing air and ground travel, the demand for gasoline, jet fuel, and diesel is crumbling. That threatened the future of the US fracking industry. The US, Stability of oil-dependent states and squeezed the flow of petrodollars through a global economy in crisis.
The restriction on oil production will last 2 years but not at the same level as these first 2 months, that is, in June, the cut of 10 million barrels will be reduced to 7.6 million per day until the end of the year, and then to 5.6 million until 2021 until April 2022.
As for demand, Amrita Sen, chief analyst at consultancy Energy Aspects Ltd assures Bloomberg that demand has plummeted to more than double the 9.7 million barrels a day.
The tanker charter rates
Taking into account the conditions prior to the agreement, the freight rates for oil tankers on routes from the Middle East to China doubled in two occasions in March due to the desire of producers, refiners, and merchants to secure ship that transport or store the global excess of oil generated by the oversupply of Russia and Saudi Arabia. See Article: Oil tanker freight rates double.
However, taking into account the drop in demand and the 10% reduction in global oil production, it is expected that freight rates will be reduced and that oil tankers will fulfill the storage function while supply levels out with demand.
