OPEC+ and G20 Agree on Largest Ever Oil Production Cut... 'Supply and Demand Concerns Remain'

[Asia Economy Reporter Naju-seok] The Group of Twenty (G20), including the United States, has agreed to support the largest-ever oil production cuts. The G20 stated that it would "take all necessary measures" to stabilize the oil market, which is in crisis due to the spread of the novel coronavirus disease (COVID-19). This is to support the decision by the Organization of the Petroleum Exporting Countries (OPEC) and oil-producing countries such as Russia to cut daily oil production by 10 million barrels.

In a statement released after the G20 Energy Ministers' meeting on the 10th (local time), it was stated that "necessary measures will be taken to stabilize the energy market." The statement also acknowledged "the commitments of some oil-producing countries to stabilize the energy market."

The day before, OPEC+ (a consultative group of OPEC and non-OPEC oil-producing countries) reached a provisional agreement to reduce daily oil production by 10 million barrels. However, tensions arose when Mexico, which was asked to cut 400,000 barrels per day, rejected the agreement, saying it could not accept more than 100,000 barrels. Ultimately, the agreement was reached with the United States taking on Mexico's share of the cuts.

Regarding this statement, Alexander Novak, Russia's Energy Minister, explained that "the role of the G20 is to comprehensively support the OPEC+ agreement." Foreign media have interpreted this agreement as another form of joint effort among governments and central banks amid the COVID-19 pandemic.

[Image source=Yonhap News]

However, in this agreement, countries like the United States and Canada did not present explicit production cut targets. The United States, which had been producing oil through shale with high extraction costs, has seen a reduction in oil production due to the price collapse caused by supply-demand imbalances. The U.S. has already explained that domestic oil production has decreased by 2 million barrels. Minister Novak also predicted that countries outside OPEC+ would cut 5 million barrels per day. Although not explicit, countries outside OPEC+ are also expected to participate in production cuts.

Despite the OPEC+ production cut agreement and the G20's joint commitment, market anxiety remains. This is because, although production cuts exceeding 10 million barrels are planned, the demand contraction caused by COVID-19 is significant. Analyses suggest that oil demand has decreased by 30 million barrels due to the pandemic. While excess supply oil is being stored, there are concerns about a shortage of storage capacity. Some expect that if low oil prices continue, oil wells with reduced profitability will cease production, and new drilling projects will be postponed. However, this could lead to a long-term contraction of oil production capacity itself.