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OPEC+ Finalizes a Historic Agreement to Reduce Oil Supply

By Matthew DiLallo - Apr 13, 2020 at 10:52AM

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Leading oil-producing nations join forces to slash global oil output by about 10%.

Members of OPEC have agreed to partner with several non-member nations on a coordinated effort to stabilize the oil market. Overall, 23 countries -- dubbed OPEC+ -- will slash supplies by 9.7 million barrels per day (BPD) starting in May, according to a report by The Wall Street Journal. That's roughly equivalent to 10% of the global oil production. 

Saudi Arabia and Russia will reportedly shoulder the bulk of the supply curtailment, reducing their output by 6 million BPD. Meanwhile, other producers, including the U.S., will contribute a combined 3.7 million BPD of additional cuts. The U.S. agreed to reduce its production by 300,000 BPD to help cover for Mexico, which wasn't willing to meet OPEC's request of a 400,000 BPD reduction. Instead, Mexico will cut production by 100,000 BPD. The U.S. output reduction will mainly come via market-driven losses as producers in the country are shutting-in wells due to poor economics and lack of storage capacity. Continental Resources (CLR -0.68%), for example, slashed its output by 30% because of low demand. 

Two people shaking hands with an energy facility in the background.

Image source: Getty Images.

The initial 9.7 million BPD reduction will cover May and June. After that, the supply cut will drop to 8 million BPD for the remainder of this year and then to 6 million BPD from next January through April of 2022. This extended reduction will burn off supplies that have piled up in storage over the past month as a result of the demand destruction from the COVID-19 outbreak and a surge in production from Russia's price war with Saudi Arabia.

Market watchers, however, were hoping for an even deeper initial reduction of 15 million to 20 million BPD to help offset the steep demand decline from COVID-19. Instead, the group agreed to support the market for a longer duration. 

Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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