Failure of Oil Production Cut Agreement Among Oil-Producing Countries... 'Low Oil Price Era Inevitable'

OPEC Calls for 1.5 Million Barrel Daily Production Cut
Agreement Fails Due to Russia's Opposition
Oil Prices Plunge on Failed Deal News
Analysis of Russia's Choice to Block US Shale Industry

[Asia Economy Reporter Naju-seok] Oil prices plummeted as the Organization of the Petroleum Exporting Countries (OPEC) and Russia failed to reach an agreement on production cuts related to the novel coronavirus disease (COVID-19). With the failure to reduce supply, international oil prices are entering a prolonged low-price era.

On the 6th (local time), the OPEC+ (a consultative group between OPEC member countries and non-OPEC oil-producing countries) meeting held in Vienna, Austria, ended without an agreement on production cuts, causing turmoil in the global oil market. Due to this failure, West Texas Intermediate (WTI) crude oil plunged 9.43% from the previous trading day, falling to $41.57 per barrel. This price level is the lowest since 2017.

[Image source=Reuters Yonhap News]

According to the reported agreement document, OPEC+ plans to continue further discussions, but the production cut agreement anticipated by the market was not reached. As a result of this failure, the possibility of a sharp drop in oil prices has emerged, inevitably impacting not only the global oil-related industries but also countries that relied on oil production for their imports.

Initially, OPEC proposed reducing daily oil production by 1.5 million barrels in response to a global oil demand decrease of 2.1 million barrels per day due to COVID-19. On the other hand, Russia argued that market assessments should be postponed and that natural production cuts could occur due to supply issues in Libya and Venezuela.

Experts find Russia's opposition to production cuts difficult to accept. Helima Croft, Global Commodity Strategist at RBC Capital Markets, said, "OPEC and Russia are staring into a deep quagmire," adding, "This decision could mark the end of cooperation between Russia and Saudi Arabia. I don't understand what can be gained by setting fire to one's own house (opposing production cuts)."

However, some view this choice as a result of a power struggle over the future of the global oil market. It is suggested that Russia may have deliberately induced low oil prices to deal a blow to the U.S. shale industry.

The United States produces oil and natural gas from shale, but due to the enormous investment costs, the market requires oil prices to stay above a certain level to remain stable. If the low-price market continues, the shale industry will inevitably suffer overall damage.

Geopolitical dynamics are also expected to change. Saudi Arabia, the dominant power in the Middle East, has maintained a cooperative relationship with Russia through OPEC+; however, this failure to reach an agreement has inevitably damaged trust.

[Image source=Yonhap News]

Led by Saudi Arabia and Russia, OPEC+ has been the forum determining oil market supply and demand since 2016. International oil prices have been maintained at around $65 to $70 per barrel through OPEC+.

With this agreement failure, oil-producing countries will maintain their current production levels. Previously, OPEC+ had agreed to cut oil production by 2.1 million barrels per day until the second quarter of this year. Due to the failure of additional production cut agreements related to COVID-19, the scale of cuts is expected to remain unchanged. Saudi Arabia is also expected to maintain the existing low oil prices following the failure of the production cut agreement.

OPEC plans to hold a meeting on June 9 to analyze the current oil price policies.

This content was produced with the assistance of AI translation services.