The new OPEC-Russia agreement to steeply cut production should help the oil market avoid a complete meltdown, but it's nowhere near enough to undo the damage from the COVID-19 pandemic, analysts say.

Why it matters: It's the first major coordinated response to the pandemic that's creating an unprecedented collapse in global oil demand and has pushed prices to very low levels.

Driving the news: The OPEC+ group, led by Saudi Arabia and Russia, yesterday held marathon remote talks that yielded a preliminary agreement to jointly pare back production by 10 million barrels per day for two months beginning in May.

  • The size of the cuts then declines in stages through the end of April 2022 (but would be reviewed before that date).
  • G20 energy ministers are holding separate but related talks today that could yield substantial additional curbs.
  • The deal marks a truce between the Russians and Saudis, whose failure to reach an agreement a month ago worsened the price collapse, sending prices to their lowest levels in two decades before more recent (but limited) gains.

Catch up fast: Delegates could not reach an agreement with Mexico on the size of its contribution, so the official OPEC+ statement notes the result is "conditional on the consent of Mexico."

What's next: Now all eyes are on remote talks underway this morning among energy ministers from G20 nations, including the U.S.

The intrigue: The U.S. has not offered a firm production-cutting commitment. But Saudi Arabia — which is OPEC's dominant producer — appears satisfied with the White House posture that market-driven declines represent the U.S. contribution.

  • Saudi energy minister Prince Abdulaziz bin Salman, asked by Reuters about other countries including the U.S., Canada and Brazil joining the effort, said: “They will do it in their own way, using their own approaches, and it is not our job to dictate to others what they could do based on their national circumstances.”
  • President Trump spoke by phone with Russian President Vladimir Putin and Saudi King Salman Thursday evening.

The global benchmark Brent crude closed in the mid-$31-per-barrel range Thursday.

  • That's several dollars below where it ended last week, and for that matter, where it was earlier in the day, when the market responded to expectations of a major deal.
  • However, it's still around $10 above where it was in the middle of last week.

What they're saying: The new production-cutting deal is both very big and insufficient to bring balance back to capsized oil markets, oil analysts said.

  • That's because lockdowns and the massive slowdown in economic activity are causing declines in demand that far outstrip the planned 10 million barrel-per-day cut, though there will also be declines from producers outside OPEC+.

The big picture: Estimates vary, but some analysts see near-term demand loss in the 20 million-30 million barrel-per-day range, which is immense in a roughly 100 million barrel-per-day market.

  • The demand loss is so severe that it's testing the limits of physical oil storage capacity.

How it works: "The proposed 10 million bpd cut by OPEC+ for May and June will keep the world from physically testing the limits of storage capacity and save prices from falling into a deep abyss, but it will still not restore the desired market balance," the consultancy Rystad Energy said in a short note.

  • "At the current rate of stock build, storage will be full at some point in May and crude production will need to be curtailed by 15-20 million b/d," Chris Midgley of S&P Global Platts Analytics said in a note.

The intrigue: One interesting question is what mix of U.S. pressure and economic self-interest led to the revival of Saudi-Russia cooperation on production.

  • "I think Saudi Arabia values its perception as a responsible stabilizer of oil markets in a time of crisis like this," Jason Bordoff, head of a Columbia University energy think tank, tells Axios.
  • "Both Saudi Arabia and Russia have come under intense pressure from Congress and the White House to prop up oil prices, and would like to see higher oil prices themselves as they face significant domestic fiscal pressures," said Bordoff, who has more to say about the limits of global oil cooperation here.

Editor's note: This story has been corrected to reflect the price of Brent crude oil during trading on Thursday (not Friday).

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