The world’s largest oil producers were yesterday closing in on a deal to rescue crude markets from a coronavirus-induced collapse after US President Donald Trump stepped in to broker a truce.
An unprecedented cut of about 10 percent in global crude production — which seemed unlikely last week, when Trump first floated the idea in a tweet — was all but certain on Friday, with Mexico the last holdout.
A compromise backed by Trump was yesterday to be discussed between the Latin American country and Saudi Arabia.
The survival of thousands of crude producers, millions of jobs and the economies of oil-dependent nations are hanging in the balance as COVID-19 pandemic wipes out demand in a world awash with crude.
Several US shale producers are on the brink of bankruptcy, Russia risks having no place to store its crude and, for all its low-cost production, Saudi Arabia needs higher prices to fund its budget.
The G20, after an online meeting on Friday, said that it would take “all the necessary measures” to maintain a balance between oil producers and consumers, but it made no commitment toward specific steps on production cuts.
After Trump held calls with Russian President Vladimir Putin and Saudi Arabian King Salman bin Abdulaziz Al Saud over the past few days, the two rivals were ready for a deal at an OPEC+ virtual meeting on Thursday, followed by the G20 video conference on Friday.
That meant getting past their grudge over Trump’s stance that the US’ contribution would be in the form of cuts that have already started to happen naturally over time as explorers adjust to the crisis.
Then Mexico threw a wrench into the whole process.
Mexican Secretary of Energy Rocio Nahle did not budge from her insistence that the country could only cut output by 100,000 barrels per day, 300,000 less than its fair share of 23 percent reductions by everyone in OPEC+.
On Friday morning, Mexican President Andres Manuel Lopez Obrador said that he had resolved the matter in a telephone call with Trump — the US would make an additional 250,000 barrels per day of cuts on Mexico’s behalf.
Trump on Friday said that he had agreed to “help Mexico along” in making a deal with Russia and Saudi Arabia.
“We are trying to get Mexico, as the expression goes, over the barrel,” Trump told a White House news conference.
The shale boom that turned the US into the world’s largest oil producer is unraveling fast.
Last week, the country’s production fell by 600,000 barrels per day from a near-record 13 million as shale explorers idle rigs in the Permian Basin of west Texas and elsewhere in the country. That is almost the equivalent of wiping out Venezuela’s current output.
US Secretary of Energy Dan Brouillette, in opening remarks at the G20 meeting, said that he predicted a decline of nearly 2 million barrels per day in US output by the end of this year.
Russia appeared satisfied with the unusual math to include part of that as Mexico’s contribution.
Kremlin spokesman Dmitry Peskov told reporters in Moscow that Putin considers the OPEC+ deal to be fully agreed and regards it “very positively.”
While there was no indication that Saudi Arabia had accepted the proposal — and Trump could not say for sure if the deal would go ahead — the setback from Mexico was relatively small compared with all the frustration the kingdom had to swallow.
Riyadh had expected the G20 meeting would win it at least 5 million barrels per day of production reduction commitments from producers outside of OPEC+ — and for now it has none.
If the deal can be finalized, the proposed 10 million barrel per day OPEC+ cuts would dwarf any previous market interventions. They would also end the destructive price war between Riyadh and Moscow that has flooded the market with crude just as demand collapses because of coronavirus lockdowns worldwide.
“Even if poorly implemented, the agreement is substantial and will make a difference to the market,” Wood Mackenzie Ltd vice president of macro oils service Ann-Louise Hittle said.
Partial compliance of the kind that Mexico is demanding “won’t stop this production agreement from having a big — and swift — impact on supply and demand fundamentals,” Hittle said.
If Saudi Arabia can overcome obstacles with G20 partners and lead the world to a 15 million barrel per day production cut, it would be an historic achievement.
However, it would also be just a fraction of the 20 million to 35 million barrels per day in estimated global demand losses as billions of people stay confined to their homes and businesses close to slow the spread of the novel coronavirus.
West Texas Intermediate on Thursday plunged 9.3 percent to US$22.76 per barrel, as traders and analysts said that the cut was too small to prevent an oversupply of crude.
Oil markets were closed for Good Friday.
“With demand likely down 20 percent this quarter, we believe the agreed cuts won’t be enough to prevent oil inventories from rising sharply over the coming weeks,” UBS Group AG commodity analyst Giovanni Staunovo said.
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