Mexico’s refusal to reduce its oil production in line with the massive 10 million barrel per day cuts proposed by the OPEC-plus producer group has left the historic deal in limbo.
Energy Intelligence sources confirmed that Mexico insisted on delivering just 100,000 b/d of the roughly 400,000 b/d in cuts required by the OPEC-plus proposal, which amounted to a near-term reduction of 23% for all OPEC-plus members.
In a surprise move, Mexican President Andres Manuel Lopez Obrador and US President Donald Trump said the US would chip in reductions of another 250,000 b/d on Mexico’s behalf.
But Trump made clear that the drop in US production would result from ongoing declines due to poor oil prices that are reducing activity and forcing some companies to shut down their wells — not from additional government-led shut ins.
“The United States will help Mexico along and they’ll reimburse us sometime at a later date when they’re prepared to do so,” Trump said at a Friday press conference.
But Saudi Arabia was not comfortable with the arrangement and continued to press Mexico to pledge its allocated cuts under the agreed upon formula.
That meant the OPEC-plus production cuts remained “conditional on the consent of Mexico. “Talks led by Saudi Arabia were expected to continue on Saturday to try to resolve the impasse.
The OPEC-plus nations — which include major producers Saudi Arabia and Russia — struck a deal that commits them to joint cuts of 10 million b/d in May and June, with cut volumes lightening to 8 million b/d in July-December and 6 million b/d from January 2021 through April 2022.
OPEC-plus had been hoping that other countries — including the US, Canada, Brazil and Norway — would contribute combined cuts of up to 5 million b/d.US officials have estimated the country’s production will decline by some 2 million b/d by the end of this year.
G20 energy ministers held video conference talks on Friday, but in a statement following the meeting, they simply said they would continue to cooperate on the issue and did not pledge a specific level of additional cuts.
The targeted “headline” cuts of 15 million b/d in the initial phase of the deal would amount to roughly 15% of the global oil market before the pandemic hit — grounding planes, confining people to their homes and triggering a worldwide recession.
OPEC Secretary-General Mohammed Barkindo told the G20 meeting that demand destruction was “jaw-dropping” and that if no action were taken, oversupply would hit 14.7 million b/d during the current quarter.
In addition to the unorthodox Trump-Mexico side-deal, the last few days also provided evidence of a remarkable turnaround in relations between Saudi Arabia and Russia.
Only a month ago, irreconcilable differences between Riyadh and Moscow appeared to have torpedoed more than three years of collaboration on supply management, with Russia rejecting a Saudi ultimatum that it must accept additional cuts.
As recently as last weekend, the two oil market heavyweights were playing the blame game, each accusing the other of wrecking the OPEC-plus alliance in which they have worked together.
The deal reflects the efforts of the leaders of the world’s top three producers: Russia’s President Vladimir Putin, King Salman of Saudi Arabia (and his son Crown Prince Mohammed bin Salman) and Trump.
The US president drove Riyadh and Moscow toward a deal with a carrot-and-stick policy and popped up again on Friday to try to clear the Mexico logjam.
In the end, the Saudis and Russians recognized that the current state of the global economy and the oil market left them with their backs to the wall (related).
Trump also appears to have been driven by a strong desire to protect the US oil industry, even though the US — despite being the world’s top producer — is far less dependent on oil than the other two countries.
Energy ministers and other participants in the G20 video conference hosted by Saudi Arabia on Friday were almost unanimous in declaring that the oil industry faced a grave threat that required urgent action.
“We must stabilize world energy markets by putting an end to this dangerous price decline,” said US Energy Secretary Dan Brouillette.
Fatih Birol, the head of the International Energy Agency, said the coronavirus had delivered a “systematic shock that threatens global economic and financial stability.
“Indian Oil Minister Dharmendra Pradhan acknowledged that producers needed to act to safeguard future supply, but urged producers to target “affordable” prices “to allow for a consumption-led demand recovery.”
This is a critical moment for joint market management efforts by producers and for Saudi leadership of OPEC. The Mexican standoff needs to be resolved swiftly, or the market reaction is likely to be worse than if the talks had never happened.
Official monthly selling prices for Saudi crude — delayed from April 4-5 in order to allow for joint production cuts to be priced in — were expected to be released at the weekend. Any further delays could undermine customer confidence in Saudi Aramco.
COURTESY: Amena Bakr, is of Dubai, Rafiq Latta, Nicosia, Nelli Sharushkina, Moscow, and Noah Brenner, Houston
