Drop It Like It’s Hot (Oil): Oil prices drop after OPEC deal falls through
April 4, 2020
2 min read
What's going on here?
Members of OPEC (Organisation of the Petroleum Exporting Countries) and its allies, known as OPEC+, failed to reach an agreement to cut oil production, leading to a steep drop in oil prices.
What does this mean?
The initial plan was to maintain oil prices by taking on production cuts, thereby mitigating the effects of the drop in demand from COVID-19, namely a reduction in; travel, manufacturing and global supply chains. OPEC+ member Russia refused to tighten its supply to counter the effects of COVID-19. Russia’s oil industry worries that implementing output cuts may lead to lost revenue and cede market share to competitors.
The proposed plan would have allowed an additional 1.5m barrels per day of cuts to reduce production by about 3.6% of the world’s total supply, with members of OPEC+ contributing 500,000 barrels of cuts until the end of 2020. With “no deal”, the price of Brent Crude fell 9% to $45.28, its biggest one-day loss since the 2008 financial crisis, while West Texas Intermediate prices tumbled 10.1% to $41.28.
What's the big picture effect?
Oil is the top source of income for OPEC members and dramatic price drops will strain economies, such as Iran’s and Venezuela’s. In total, a Reuters report estimates that OPEC members will lose more than £500m in revenue. OPEC members Nigeria and Algeria have said that the breakdown of the deal will hurt producers.
The dramatic drop in oil prices highlights the devastating effects of COVID-19 on the global economy. Airlines have been hit with decreasing demand as most people opt to stay at home rather than travel abroad. Manufacturing factories have been forced to shut due to health regulations prohibiting the gathering of large groups of people and encouraging a policy of self-quarantine. Small, independent businesses are shutting down. All this has affected the prices of oil globally. The inability of OPEC and OPEC+ to reach a deal only furthers market concerns and points to a gradually slowing economy.
Report written by Robyn Ma
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