Market Herald logo

Subscribe

Be the first with the news that moves the market
  • On Sunday, OPEC+ countries agreed to drop oil production by 9.7 million barrels per day for the next two years
  • OPEC and Russia have been in a trade war for the past 6 weeks over production quotas
  • When talks failed to tighten production in March, Saudi Arabia and Russia uncapped production, causing oil prices to plummet
  • This new agreement is the biggest single day oil production drop in history
  • North American oil producers have the highest production costs, so the price war has hit them especially hard

An agreement between OPEC+ countries to cut oil production by 9.7 million barrels per day may save Canada’s energy sector.

US President Trump announced the decision yesterday. The agreement is to a series of staggered tranches, resulting in a per day production drop of 9.7 million barrels. This represents the largest production cut in history.

In March, talks between OPEC and Russia to agree on a 2020 production cap failed. As a result, both sides uncapped production in order to hurt the other.

Saudi Arabia, the world’s biggest oil producer, effectively opened the floodgates, drowning the market in an oil surplus.

On that day in March, oil indexes globally fell 20 per cent, the largest drop on record. The Brent Price Index hit its lowest price since the Iraq War 18 years ago, trading below $20 a barrel.

There were real fears that the world would run out of storage facilities to house all the oil being produced.

With the added impact of COVID-19 shutdowns this year, some estimates have put global oil demand at a third below what it was last year.

That massive dip in demand, coupled with a massive oversupply, has effectively created the perfect price storm.

Shale oil and oil sands producers like US and Canadian companies are more vulnerable to price fluctuations. This is because their production price per barrel is much higher than competitors.

Since this started, most energy companies have slashed capital expenditure, and laid off many employees.

Due to COVID-19 restrictions, many energy sector workers have been taking accrued leave, or companies have suspended operations anyway.

But there were doubts about whether there would be jobs for those workers to return to, when restrictions lifted.

The fear that companies will not be able to sell the oil they produce may not go away, even with this new deal. However, the production cut should free up storage space and allow the industry to continue operating, at the very least.

North America and Canada, which are not a part of OPEC+, were asked to follow suit and cut production alongside other oil-producing nations. It appears that this will happen naturally, with the difficult operational environment and COVID-19 shutdowns slowing output.

More From The Market Herald

" Trican Well Service Ltd.(TSX:TCW) renews NCIB

Trican Well Service (TCW) has received approval to renew its normal course issuer bid.

" Enbridge (TSX:ENB) completes acquisition of Tri Global Energy

Enbridge (ENB) has finalized its acquisition of Tri Global Energy.

" Horizon (TSXV: HPL.H) closes first tranche of non-brokered private placement

Horizon Petroleum (HPL.H) has closed the first tranche of its previously-announced non-brokered private placement.

" ShaMaran Petroleum (TSXV:SNM) appoints new CFO

ShaMaran Petroleum (SNM) has appointed Elvis Pellumbi as the new Chief Financial Officer, effective October 1, 2022.