A global deal to cut oil production and save the market from a coronavirus-induced breakdown proved elusive on Friday as a diplomatic initiative led by Saudi Arabia suffered repeated setbacks.
It remained unclear whether OPEC+ had resolved the differences with Mexico that would allow its agreement for a record 10 million barrel-a-day supply reduction to proceed. A draft communique from a meeting of energy ministers from the Group of 20, which the cartel had hoped could add another 5 million barrels a day of cuts, didn’t commit to any specific supply reductions, according to a delegate.
The diplomatic obstacles cast doubt on efforts to revive the market from a debilitating slump that’s exposed governments and companies around the world to severe financial pressure. The proposed cuts, which would dwarf any previous market interventions and have been sponsored by U.S. President Donald Trump, would end the price war between Riyadh and Moscow that helped pushed oil down to the lowest in almost two decades.
“Even if poorly implemented, the agreement is substantial, and will make a difference to the market,” said Ann-Louise Hittle, vice president of macro oils at consultant Wood Mackenzie Ltd. 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.”
All but one nation among Organization of Petroleum Exporting Countries and its allies endorsed the production cut equivalent to about 10% of global supply. Mexico insisted that it could only cut by 100,000 barrels a day, not the 400,000 OPEC+ was asking for and blocked passage of Thursday’s deal.
On Friday morning, Mexican President Andres Manuel Lopez Obrador said he had resolved the matter in a phone call with Trump. The U.S. would make an additional 250,000 barrels a day of cuts on Mexico’s behalf, Lopez Obrador said at a press conference, although it was unclear whether Saudi Arabia had accepted the proposal.
Russia appeared satisfied. Kremlin spokesman Dmitry Peskov told reporters in Moscow that President Vladimir Putin considers the OPEC+ deal to be fully agreed and regards it “very positively.”
OPEC+ has been put under intense pressure to do a deal by Trump and American lawmakers, who fear thousands of job losses in the U.S. shale patch. Yet the American president hasn’t promised to make deliberate production cuts. Instead, he will let market forces do their work, allowing low prices to deliver “automatic” output curbs.
That sentiment was reiterated by his energy secretary Dan Brouillette in opening remarks at Group of 20 meeting on Friday. He predicted a decline of nearly 2 million barrels a day in U.S. output by the end of this year.
“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.
If Saudi Arabia can overcome the obstacles and lead the world to a 15 million barrel-a-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 a day in estimated global demand losses as billions of people stay confined to their homes and businesses close to slow the spread of the coronavirus.
West Texas Intermediate crude plunged more than 9% on Thursday, settling at below $23 a barrel, as traders and analysts said the cut was too small to prevent an oversupply of crude.
“With demand likely down 20% 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.