Business

The OPEC+ production cuts aren't big enough

Posted April 13, 2020 7:47 a.m. EDT

— After four days of negotiations, Saudi Arabia and Russia have struck a deal with other major oil producing nations to slash production by 9.7 million barrels per day in May and June, the deepest cut ever negotiated.

It won't be enough.

The agreement, which was announced Sunday after a highly unusual series of interventions by US President Donald Trump, will reduce global crude output by roughly 10%. The problem: The demand drop is even bigger.

The coronavirus pandemic has sharply reduced the amount of energy needed to power the global economy, contributing to a dramatic collapse in prices. According to analysts at Goldman Sachs, the reduction in demand amounts to roughly 19 million barrels per day in April and May.

Goldman Sachs called the production cuts "historic yet insufficient," adding that the reductions were "still too little and too late" to avoid oil storage facilities overflowing.

"Ultimately, this simply reflects that no voluntary cuts could be large enough" to offset the loss in demand, they added.

Markets appeared to share that view on Monday. Brent crude, the global benchmark, gained in early trading but quickly reversed course. It was last down 0.7% to $31.26, bringing its decline since January 1 to nearly 53%.

US crude prices increased by just 0.6%, still stuck below $23.

The market reaction could prompt some further soul searching in Moscow, Riyadh and Washington.

The historic production agreement comes mere weeks after Saudi Arabia and Russia abandoned years of output cuts, triggering a price war that flooded the market with crude.

In doing so, Russian President Vladimir Putin and Saudi Crown Prince Mohammed bin Salman knew that prices would drop. But they must not have anticipated the scale of demand destruction caused by the coronavirus.

Faced with a much bigger than expected hit to their economies, the leaders reversed course.

Trump touted the deal on Twitter, saying Sunday it "will save hundreds of thousands of energy jobs in the United States." But that will only be possible if prices rebound sharply.

Heaping praise on the leaders of Saudi Arabia and Russia for trying to boost prices marks a dramatic turnaround for Trump.

Since winning the presidency, Trump had repeatedly hammered OPEC for engineering higher oil prices that hurt American drivers. He has called the group a "monopoly" and said "they are robbing our country blind."

"OPEC, please relax and take it easy. World cannot take a price hike — fragile!" the president tweeted in February 2019.

Fast forward to 2020, and Trump is actively helping to broker the group's new production cut. He even offered to pick up some of Mexico's share of the reduction to help pave the way for the agreement.

How will the world get back to work?

Spain has suffered greatly from the coronavirus pandemic, with more than 17,200 deaths and 166,000 infections. But the country is now taking its first steps to loosen severe restrictions that forced businesses to shut.

Construction and manufacturing companies will be allowed to resume operations this week, the government announced over the weekend, and some other measures will be eased. Hairdressers will be able go to clients' homes but can't open their salons, for example.

Prime Minister Pedro Sánchez said that the country's return to normal life would be "progressive." For now, bars and entertainment venues will remain shuttered. "We can't even know what kind of normality we're returning to," Sánchez said last week.

Pressure is building on governments to explain their plans because of the mounting economic costs of measures designed to contain the coronavirus. But getting it wrong could lead to more outbreaks, another round of restrictions on work and public life, and much more pain for business.

In the United States, Smithfield provides an example of the damage that the coronavirus can cause when it gets inside a workplace.

The company's facility in Sioux Falls, South Dakota, accounts for between 4% and 5% of the United States' pork production and employs about 3,700 people.

South Dakota Governor Kristi Noem said Saturday that Smithfield employees accounted for more than half of the 430 active coronavirus cases in the state. Because of that, she recommended that Smithfield suspend operations for at least two weeks.

The closure could put the country's meat supply at risk.

"The closure of this facility, combined with a growing list of other protein plants that have shuttered across our industry, is pushing our country perilously close to the edge in terms of our meat supply," Smithfield CEO Kenneth Sullivan said in a statement Sunday.

Bob is back

Bob Iger was supposed to be taking a step back at Disney.

The veteran media executive stepped down as CEO in February, assuming the role of executive chairman, and Disney named theme parks guru Bob Chapek as his replacement.

But the coronavirus has forced Disney to close its parks and delay movie releases, at huge financial cost. It's also pulled Iger back into the action, according to the New York Times.

The newspaper reports that Iger "has effectively returned to running the company" and is "now intensely focused on remaking" its business.

It's the latest example of how the coronavirus is radically upending the business world and forcing companies to adapt to a harsh new reality.

"A crisis of this magnitude, and its impact on Disney, would necessarily result in my actively helping Bob [Chapek] and the company contend with it, particularly since I ran the company for 15 years!" Iger said in an email to the New York Times.

Up next

Coming tomorrow:

IMF World Economic OutlookJPMorgan Chase, Wells Fargo and Johnson & Johnson earnings

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