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The Oil Agreement

Sunday`s agreement follows a busy week for oil ministers. On Friday, the Group of 20 held a separate virtual meeting to discuss the state of global oil markets, sparking speculation that further production cuts might be possible. (The G20 includes producers such as Canada and the United States who are not participating in OPEC reductions) However, the meeting ended without any new commitments announced publicly. Trump backed President Andrés Manuel Lepez Obrador by vaguely promising that he would balance the difference and helping the Saudis and Russians not abandon the interim agreement. Under the agreement, members of the Organization of Petroleum Exporting Countries, along with Russia and other countries, will increase production by 500,000 barrels per day in January and possibly a similar amount in the following months. The increase, less than 1% of the global oil market, comes at a time when demand is still under pressure from the coronavirus pandemic. It was not immediately clear whether the Trump administration has made a formal commitment to cut U.S. production, but in the face of falling prices, many companies in the country have already cut production. There is no international mechanism to strictly enforce these production agreements and fraud is common.

The agreement is massive and represents the largest drop in production in OPEC history. The reduction is more than twice as large as the 4.2 million barrels per day that the oil cartel made through a series of budget cuts during the 2008 financial crisis. However, analysts say this is likely to be overshadowed by the magnitude of the loss of demand in the grip of the pandemic. Saudi Arabia and Russia agreed on Sunday with other oil-producing nations to cut production by 9.7 million barrels per day for the next two months to stem a drop in oil prices caused by the coronavirus pandemic and the feud between Moscow and Riyadh. Negotiations got bogged down when Mexico refused to back an agreement reached by Russia and Saudi Arabia, saying it would cut only 100,000 barrels per day, not 400,000 barrels. Saudi Arabia strongly opposed Mexico`s position and feared that if Mexico could hold the others, it would follow. On March 8, 2020, Saudi Arabia launched a price war with Russia, which facilitated a quarterly drop of 65% in the price of oil. [1] In the first weeks of March, U.S. oil prices fell by 34%, crude oil by 26% and Brent oil by 24%.

[2] [3] The price war was triggered by a breakdown in the dialogue between the Organization of the Petroleum Exporting Countries (OPEC) and Russia over planned oil production cuts in the midst of the COVID 19 pandemic. [1] Russia left the agreement, which led to the downfall of the OPEC alliance.