OPEC+ reached an agreement to cut 9.7 million barrels per day (mb/d) beginning in May which is a record-breaking cut, but it still may not be enough to stabilize the market. U.S. Secretary of Energy Dan Brouillette said that the total number of cuts globally, when you add in all the non-OPEC countries, should be closer to 20 mb/d. In reality, the number is much smaller than that and will still have an impact, even if it’s not the cut some were expecting. The cuts will help prevent a complete meltdown, even if there is no immediate price rally. The deal is expected to stabilize the global oil price and reduce the market volatility according to Bank of America Merrill Lynch.
The cuts from OPEC+ help the U.S. Shale industry as the projected production cuts for the U.S. produced shale will be closer to 1.8mb/d instead of the 3.5mb/d cut predicted by Bank of America. However, there is already a meltdown happening in North America. According to the Wall Street Journal, spending cuts of $50 billion have announced over the past month. Rig counts have dropped by 300 since mid-March. Canadian rig count has hit a record low of 35 when they had 240 in operation in late February. Output in Canada has decreased by over 300,00 barrels per day(bpd).
With demand being down 25mb/d to 30mb/d right now, the cuts are not enough to offset the demand. Long-term demand is expected to fall by 9.2mb/d. On the supply side, we also need to see if all cuts will take place. Historically, there have been countries who simply refuse to follow through with cuts. Mexico already objected to the proposal of 400,000bpd and instead agreed to cut 100,000 bpd. Mexico was honest about their cuts but there are many countries who may simply overproduce regardless of the agreement. In the end, the cuts are not enough to match the demand destruction at the moment.