Vienna: An historic multilateral deal to lower global oil production and stabilize prices, led by record cuts from Saudi Arabia and Russia, is at risk of collapse after Mexico refused to sign up.
The impasse casts doubt on efforts to revive the market from a debilitating coronavirus-induced slump. The deal by the coalition of nations known as OPEC+, which dwarves s previous interventions and has been sponsored by US President Donald Trump, would end the price war between Riyadh and Moscow that helped pushed oil down to the lowest in almost two decades.
Mexican President Andres Manuel Lopez Obrador said he had talked to Trump and had reached a deal with OPEC+, but it wasn’t immediately clear if his position had shifted.
Saudi Arabia made the whole deal dependent on Mexico’s participation, pinning an accord to remove more than 10 per cent of global production from the market on an argument about a few hundreds of thousands of barrels. But Riyadh’s energy minister, Prince Abdulaziz bin Salman is determined the burden of cuts must be shared as widely as possible.
Attention now turns to the meeting of G-20 oil ministers, chaired by Saudi Arabia, where countries outside OPEC+, including the US, are expected to make commitments to support oil markets. It presents another chance to bring pressure on Mexico. Failure to nail down a deal would likely see oil prices slump again on Monday and could revive the month-long war for market share between Saudi Arabia and Russia.
“The extreme volatility we are seeing in oil markets is detrimental to the global economy at a time when we can least afford it,” said Fatih Birol, the head of the International Energy Agency, who’s been a key figure in the diplomatic effort to broker a global deal.
Putin steps in
In a sign that the the diplomatic push for a deal would continue at the highest levels, Russian news agency Tass reported that President Vladimir Putin would make more calls on the issue. He held a three-way conversation with President Trump and Saudi Arabia’s Mohammed bin Salman yesterday.
The tentative deal would result in cuts of about 10 million barrels a day during May and June. 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.
It would be the biggest cut in OPEC’s history and highlights the depth of the market’s crisis. Opening yesterday’s meeting, OPEC Secretary-General Mohammed Barkindo described the supply-deman balance as “horrifying”. But it will probably buy producers little more than a bit of time.
“With demand likely down 20 per cent this quarter, we believe the agreed cuts won’t be enough to prevent oil inventories from rising sharply over the coming weeks,” said Giovanni Staunovo, commodity analyst at UBS Group AG.
The refusal by Mexico’s Energy Secretary Rocio Nahle Garcia to accept the proposed cuts reflects her country’s determination to keep as close as possible to the production and spending plans it’s been pursuing despite the crash. In a Twitter post shortly after leaving the meeting, she said the nation is ready to reduce output by 100,000 barrels a day, far less than the 400,000 barrels a day proposed by the group, and from a higher baseline.
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.
Oil 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. Brent dropped 4.1 per cent to $31.48 a barrel on Thursday, even as the agreement began to take shape.