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  • Friday 23rd October 2020

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  • OPEC and allies agree on record oil cut deal, but it hinges on Mexico

    OPEC and allies agree on record oil cut deal, but it hinges on MexicoOPEC, Russia and other allies, a group known as OPEC+, agreed to cut oil output by 10 million barrels per day (bpd) during a meeting on Thursday, but a final agreement will hinge on Mexico.

    The record cuts of 10 million bpd or 10 percent of global supplies will start on May 1 and last for two months, according to the OPEC + statement. The subsequent plan also includes eight million bpd between July and December this year and six million bpd from January 2021 to April 2022.

    The standoff came as Mexico refused to sign the deal under which it would cut output by 400,000 bpd, which was lowered to 350,000 bpd later. Mexican President Andres Manuel Lopez Obrador announced Friday that the country will cut its crude oil production by 100,000 bpd in the next two months.

    U.S. President Donald Trump said on Friday that the country will cut American oil output by an additional 250,000 barrels per day to help Mexico contribute to global reductions.

    “The United States will help Mexico along and they’ll reimburse us sometime at a later date when they are prepared to do so,” Trump said during a White House briefing.

    With a large oil output surpassing Saudi and Russia, U.S. was invited to Thursday’s OPEC+ talks. Brazil, Norway and Canada were also invited.

    U.S. President Donald Trump spoke with Russian counterpart Vladimir Putin on Friday about the coronavirus and energy markets, the White House said.

    “President Trump and President Putin discussed the latest efforts to combat the coronavirus pandemic and maintain stability in global energy markets. The two leaders also covered critical bilateral and global issues,” according to White House spokesman Judd Deere.

    Despite the hope of the deal, oil prices plunged on Thursday, and continued to fall on Friday with Brent crude falling nearly 2.5 percent to 31.82 U.S. dollars per barrel.

    G20: Ensure energy market stability

    Group of 20 major economies on Friday also committed to safeguarding the stability and security of the oil market in a time of unprecedented international emergency.

    “The significant economic contraction and uncertain outlook due to the pandemic have exacerbated energy supply and demand imbalances, increasing energy market instability, directly impacting the oil and gas sector and spilling over into other industries, further hampering the global economic recovery,” according to a statement after a meeting by G20 energy ministers on Friday.

    “We commit to take all the necessary measures to ensure the balance of interests between producers and consumers, the security of our energy systems and the uninterrupted flow of energy,” said the statement.

    The meeting is expected to close the deal more widely with non-OPEC countries in the group including Mexico, the U.S. and Canada.

    Russia’s Energy Minister Alexander Novak later said he expected nations outside the OPEC+ group to cut by an additional five million bpd, according to Reuters.

    COVID-19 drives down demand

    The curbs in oil demand is a result of COVID-19, which the OPEC Secretary-General Mohammad Barkindo called “an unseen beast that seems to be impacting everything in its path”. He believed the impact of coronavirus will far greater than that during the great recession of 2008.

    Analyst say the deterioration of the global pandemic situation in the past month is the main reason for this massive global oil production cut.

    “The cut, if successful, can effectively slow down the surge in global oil stocks, stabilize oil prices, and provide guarantee for oil producers and oil-producing countries,” said Li Li, China head of analytics with ICIS, a global commodity intelligence provider.

    Li said that Mexico has its own difficulties, concerning such a large-scale production cut of 350,000 to 400,000 barrels per day. “The problem will be resolved through consultation among countries on an equitable basis. In addition, the cut also depends on the responses from the United States, Norway, and Brazil.”

    In terms of impact of the cut on the Chinese market, Li said that currently there is no need to worry too much about oil supply risks.

    “As for China, a major oil importer and consumer, stabilizing oil prices at the current level is encouraged as it can moderate the rise in CPI. Meanwhile, it is not necessary to worry too much about the supply risks as well as risks in international political disputes caused by the sinking of oil prices,” said Li.

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