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The OPEC+ agreement over the Easter weekend to cut production by a historic 10% has so far received a lukewarm response from the market. Faced with a historic drop in demand, Saudi Arabia and Russia cheered by President Trump finally agreed that the OPEC+ group of producers would make voluntary production cuts of 9.7 million barrels/day. That number will drop to 7.7 million barrels/day during the second half and to 5.8 million from January 2021 to April 2022.
While the number of barrels they agreed to cut will do little to off-set the current demand drop, estimated to be somewhere between 20 and 30 million barrels/day, the length of the agreement to 2022 has supported prices at the back of the curve. This on the assumption that the price of oil on the other side of the pandemic will rally as demand recovers, storage tanks begin to drain and lack of investments in new wells will support the price.
The negative reaction seen so far is a combination of several factors. First of all the deal to cut will not be implemented until May. While Saudi Arabia and its GCC friends are likely to turn down their taps from May some of the other producers, especially the 2.5 million barrels/day drop from Russia is likely to take longer. Adding to this doubts that notorious cheaters like Iraq and Nigeria will fully implement their combined cuts of 1.5 million barrels/day.