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Business Energy

Output cuts: Mexico plays spoilsport in tentative oil deal

Today’s Group of 20 summit will need to convince Mexico to return to negotiating table



A far reaching oil deal to cut production by 10 million barrels a day now hangs in the balance after Mexico refused to its terms. Now, it will need some heavy convincing for any deal to be sealed.
Image Credit: Reuters

Vienna: An agreement between Saudi Arabia and Russia for record oil-production cuts was endangered late as Mexico refused to participate in the curbs and left the meeting without approving the deal.

The impasse, which came after more than 9 hours of talks via video link, cast doubt over a global effort to revive the oil market from a debilitating coronavirus-induced slump. The OPEC+ group won’t cut output without Mexico’s participation and doesn’t intend to meet again on Friday, instead focusing on talks at the G-20 gathering also scheduled that day.

Earlier on Thursday, OPEC+ had tentatively agreed to cut production by about 10 million barrels a day in May and June, effectively ending a one-month oil price war. Saudi Arabia and Russia, the biggest producers in the group, would each take output down to about 8.5 million a day, with all members agreeing to cut supply by 23 per cent.

The curbs agreed on Thursday dwarf any previous market interventions, and are urgently needed to boost the physical market for crude - trade in actual cargoes rather than futures contracts - but they won’t match losses from the deep slump in consumption.

Attention should have turned on Friday to the Group of 20 energy ministers meeting. A contribution from major producers including the US and Canada - possibly as much as 5 million barrels a day of further supply reductions - could boost efforts to revive prices after the initial OPEC+ agreement failed to push crude higher on Thursday.

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The dogged refusal of Mexico’s Energy Secretary Rocio Nahle Garcia to accept the production level proposed for her country as part of the deal upended that schedule. In a Twitter post shortly after leaving the meeting, she said her country is ready to reduce production by 100,000 barrels a day, far less than the 400,000 barrels a day proposed by the group, and also from a higher baseline.

Not many options to choose from

The unexpected setback doesn’t change the urgent need for the Organization of Petroleum Exporting Countries and its allies to reduce production. Oil’s spectacular price crash this year has threatened the stability of oil-dependent nations, forced major companies such as Exxon Mobil Corp. to rein in spending and risked the very existence of small independents.

“Mexico can and should join the international community in stabilizing the oil market,” said Aldo Flores Quiroga, the former Mexican deputy oil minister who negotiated OPEC+ deals from 2016 to 2018. “The production cut is both necessary and possible. It’s the responsible thing to do domestically and internationally.”

Trump weighs in

OPEC+ has been put under intense pressure by President Donald Trump - who spoke with the leaders of Russia and Saudi Arabia by phone on Thursday - and American lawmakers, who fear thousands of job losses in the US shale patch.

“Both Saudi and Russia were going to have to cut anyway, and these cuts allow them to win political points too,” said Amrita Sen, chief oil analyst at consultant Energy Aspects Ltd.

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Just a drop

While the headline cut equates to a reduction of about 10 per cent of global supply, it makes up just a fraction of the demand loss, which some traders estimate at as much as 35 million barrels a day.

Prices have tumbled by half this year as the spread of the coronavirus coincided with a bitter price war that saw producers flood the market.

“COVID-19 is an unseen beast that seems to be impacting everything in its path,” Mohammad Barkindo, secretary-general of the Organization of Petroleum Exporting Countries, said in a speech at the online gathering. “The supply and demand fundamentals are horrifying” and the expected oversupply, particularly in the second quarter, is “beyond anything we have seen before.”

Runaway surplus

Barkindo urged action to tackle the growing surplus, which he estimated at 14.7 million barrels a day in the second quarter. And he wants action not only from OPEC+ producers but from nations beyond the alliance.

Russia has insisted that the US in particular do more than just let market forces reduce its record production. Trump, meanwhile, has said America’s cut will happen “automatically” as low prices put shale in dire straits, a sentiment reiterated by his energy secretary on Thursday.

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America welcomed the proposed OPEC+ cuts, saying they would send a signal that all major oil-producing countries will respond in an orderly manner to market realities caused by the virus, a senior administration official said.

Tapering off
* OPEC+’s tentative plan would see the output curbs tapering off after two months, depending on the evolution of the coronavirus. The 10 million-barrel-a-day cut may shrink to 8 million a day from July and then 6 million a day from January 2021 to April 2022, according to a delegate.

* Saudi Arabia will apply its reduction to a production level of about 11 million barrels a day, a delegate said. That’s lower than recent output levels, which rose above 12 million a day in early April. Russia would curb its supply by a similar level.

* The oil price war, which started in March after the collapse of previous OPEC+ talks, lasted exactly 31 days, far fewer than similar feuds in 1986, 1998 and 2016. But in that short period, it has forced companies from Big Oil giants to US shale independents to slash spending, fire workers and cancel projects. Meanwhile, oil-rich countries have gone cap-in-hand to the International Monetary Fund and the World Bank for help, hobbled by low prices.
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