Mexico reaches deal paving way for OPEC, Russia oil output cuts
Mexico, which was asked to cut 400,000 barrels/day, agreed to cut 100,000 barrels/day
The OPEC oil cartel and nations including Russia have agreed to boost oil prices by cutting as much as 10 million barrels a day in production, or a tenth of global supply. More countries, including the United States, were discussing Friday their own cuts in what would be an unprecedented global pact to stabilize the market.
The agreement between OPEC and partner countries aims to cut 10 million barrels per day until July, then eight million barrels per day through the end of the year and six million barrels a day for 16 months beginning in 2021.
Mexico had initially blocked the deal but its president, Andres Manuel Lopez Obrador, said Friday that he had agreed with U.S. President Donald Trump that the U.S. will compensate what Mexico cannot add to the proposed cuts.
That paves the way for cuts that experts estimate could reach 15 million barrels a day in all — about 15 per cent of world production. Such a move would be unprecedented both in its size and the number of participating countries, many of whom have long been bitter rivals in the energy industry.
The U.S. is already on track for a production decline of 2 million to 3 million barrels per day, said Dan Brouillette, secretary of the U.S. Energy Department, at a meeting of the G20 Friday.
"For our part, the United States is taking action to open our strategic petroleum reserve to store as much oil as possible," Brouillette said. "This will take surplus oil off the market at a time when commercial storage is filling up and the market is oversupplied."
'A grisly shadow hanging'
Trump also spoke Friday with President Vladimir Putin of Russia about the latest efforts to combat the coronavirus pandemic and maintain stability in global energy markets, said White House spokesperson Judd Deere. The two leaders also covered critical bilateral and global issues, he said.
It's unclear how a production cut in the U.S. would work, since oil production is not state-run, and there are thousands of independent producers. Even so, some producers in Texas and Oklahoma have been calling on state regulators to consider setting up a system which ensures that any cuts are spread fairly.
The price of crude is down by over 50 per cent since the start of the year and while that helps consumers and energy-hungry businesses, it is below the cost of production for many countries and companies. That has strained the budgets of oil-producing nations, many of which are developing economies, and it has pushed private companies in the U.S. toward bankruptcy.
Analysts warn even these proposed cuts may not be enough to offset the loss in demand over the longer term, as the coronavirus pandemic has decimated demand for energy around the world.
"COVID-19 is an unseen beast that seems to be impacting everything in its path," OPEC secretary-general Mohammed Barkindo said at the start of the meeting, according to a statement. "There is a grisly shadow hanging over all of us. We do not want this shadow to envelop us. It will have a crushing and long-term impact on the entire industry."
Mexico cuts production by 100,000 barrels a day
One breakthrough came after Mexico relented in its opposition to the deal, in which it was being asked to cut its output by 400,000 barrels a day. Mexico's president said his country will instead cut its production by 100,000 barrels per day from its current level of 1.7 million barrels a day. The U.S. will add a cut of 250,000 barrels per day to what it has already agreed.
More nations were expected to add to the effort, with Saudi Arabia chairing a G20 virtual meeting of energy ministers on Friday to discuss the oversupply in the market.
The meeting is expected to bring onboard a wider number of countries, including the U.S.
Saudi media quoted energy minister Prince Abdulaziz bin Salman as saying in his opening remarks that the pandemic means it is more vital than ever that reliable and affordable energy supplies are available. The meeting also includes representatives of OPEC.
Trump spoke earlier with King Salman of Saudi Arabia about the negotiations. The U.S. is interested in a deal because the oil price crash has caused thousands of job losses in the oilpatch just as the virus outbreak is causing a record spike in unemployment.
"There's so much production nobody even knows what to do with it, that's how it's working," Trump said at a White House news briefing.
The oil market was already oversupplied when Russia and OPEC failed to agree on output cuts in early March. Analysts say Russia refused to back even a moderate cut because it would have only served to help U.S. energy companies that were pumping at full capacity. Stalling would hurt American shale oil producers and protect market share.
Russia's move enraged Saudi Arabia, which not only said it would not cut production on its own but said it would increase output instead and reduce its selling prices in what became effectively a global pricing war.
COVID-19 crashed oil market
In the time since, prices have collapsed as COVID-19 causes have largely halted global travel. International benchmark Brent crude was around $32 US ($44 Cdn) a barrel as of Friday, while the U.S. benchmark West Texas crude closed under $23 ($32 Cdn).
Russia relies on oil as the main source of income and the price collapse caused the ruble to crash. That boosted the cost of imports and sped up inflation.
Kremlin spokesperson Dmitry Peskov said Friday that Putin views "very positively" the result of the negotiations and added that Russia welcomes Mexico's decision to join the deal.
The agreement is a win for everyone, the world's economy would have "plunged into chaos" if the deal had been broken off, Peskov added.
Analysts nevertheless warn the proposed 10 million barrel per day cut for May and June will not be enough to offset plummeting demand for oil globally, and runs the risk of coming too late as storage capacity for oil nears its maximum. Even if North American producers took five million barrels a day off the market, there could still be an excess supply of five-10 million barrels per day.
Research firm Rystad Energy estimates the imbalance for April is 27.4 million barrels per day. The firm says global storage of crude is already close to being filled to the brim, estimating that on average 79 per cent of the world's oil storage capacity is already full. Around 7.4 billion barrels of crude and products are in storage, including 1.3 billion currently aboard tankers at sea.
Chris Midgley, global head of analytics for S&P Global Platts, said the proposed cuts are unlikely to have any significant impact on April supply, and thus run the risk of getting close to exhausting all available storage in May.
However, a cut of 10-15 million barrels per day is enough to prop up oil prices and helps to reduce strain on crude storage facilities, analysts said.