Oil's well that ends well: Opec, allies get output cuts deal done

Saudi Energy Minister Prince Abdulaziz bin Salman, chairing the virtual extraordinary meeting of the virtual extraordinary meeting of Opec and its allies.

Opec and non-Opec oil producing countries at a crucial ministerial meeting held via a video conference on Thursday agreed to slash oil output by a massive 10 million bpd until July, and a further eight million bpd cut through the end of 2020.
And after much wrangling, Mexico - the lone nation resisting any deal during the marathon talks - finally agreed, thanks to intervention from US President Donald Trump, who  "generously" agreed to cut American oil output by an additional 250,000 bpd to help Mexico contribute to global reductions, his Mexican counterpart said.
The first two phases of production cuts lasting until the end of the year will be followed by a six million bpd cut for a period of 16 months, from January 2021 to April 30, 2022, official UAE news agency Wam said.
In a statement, the group known as Opec+ said the final agreement however depends on Mexico's move to comply with the decisions taken to prop up prices that have been plunging under the impact of falling demand and a surplus supply exacerbated by an ensuing price war in the backdrop of the Covid 19 pandemic's sinking the world into a standstill.
The Saudi energy minister told a conference of the G20 group of the world's largest economies on Friday that ensuring affordable energy supply is key to facilitating a global economic recovery.

"Having affordable, reliable, accessible energy supply is considered a necessity to enable basic services, including health care, and help our efforts in assisting economic recovery," Prince Abdel Abdulaziz bin Salman said in an opening speech to a video-conference of the G20 energy ministers.

Meanwhile, the president of Mexico Manuel Lopez Obrador - the lone holdout in an Opec-led deal to cut crude production - said Friday he has reached a deal with President Donald Trump to reduce oil output. He said that Trump agreed to cut US production by 250,000bpd "as compensation" for Mexico.

Speaking at a regular news conference, Lopez Obrador said Mexico, which is an Opec ally, had been pressed to make cuts of 400,000bpd, before the group lowered the target to 350,000 bpd.

"President Trump said the United States committed to reducing by 250,000 (barrels), on top of what it was going to do, for Mexico, in order to compensate," he said.


Oil tumble

Oil prices tumbled on Thursday despite Opec+ nearing agreement as the lockdowns ordered across the world put the global economy in a limbo, and traders reckoned that even a combined reduction of 15 million bpd would be too little to stabilise the market. International benchmark Brent crude traded Friday over $31 a barrel while the US benchmark West Texas crude traded under $23, half their level at the end of 2019.

The oil market glut deepened over the past few weeks 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 US energy companies that were pumping at full capacity. Stalling would hurt American shale-oil producers and protect market share.

"The baseline for the calculation of the adjustments is the oil production of October 2018, except for the Kingdom of Saudi Arabia and the Russian Federation, both with the same baseline level of 11 million bpd," Wam said.

The meeting was held under the chairmanship of Prince Abdul Aziz Bin Salman, Saudi Arabia's Minister of Energy, and co-chair Alexander Novak, Minister of Energy of the Russian Federation. The agreement will be valid until 30th April 2022, however, the extension of this agreement will be reviewed during December 2021. The ministers agreed to meet again on 10th June 2020 via webinar to discuss further actions needed to balance the market.

"All the above measures were agreed by all the Opec and non-Opec oil producing countries participating in the Declaration of Cooperation, with the exception of Mexico, and as a result, the agreement is conditional on the consent of Mexico," said Wam.

Analysts said even in a possible scenario that a rapid recovery would not take place in the third quarter, they anticipate an 18 million bpd maximum annual demand decrease in the second quarter of 2020.

Analysts at the US investment bank said: "Such cuts, if agreed upon tomorrow, would still be too little and too late to prevent a decline in prices in coming weeks as storage capacity becomes saturated."

US President Donald Trump earlier said he spoke with Russian President Vladimir Putin and King Salman bin Abdulaziz of Saudi Arabia about the negotiations.

"They're getting close to a deal that's Opec and many other countries outside of Opec, and we'll see what happens," Trump said. "There's so much production nobody even knows what to do with it, that's how it's working," he said.

But by early Friday, Kuwait Oil Minister Khaled Al Fadhel suggested the deal was not yet done. "At the meeting for the Opec group that ended at 3am, Mexico disrupted the agreement of all the countries to reduce the production of oil by 10 million barrels a day," Al Fadhel wrote, without elaborating.

There was no immediate response from Mexico, though its Energy Minister Rocio Nahle wrote around the same time on Twitter that Mexico proposed cutting its output by 100,000 barrels a day for the next two months and would reduce output to 1.681 million bpd from 1.781 million bpd reported in March. Mexico was being asked to cut by 400,000 bpd.

Opec+ documents showed that all members would reduce output by 23 per cent, with Saudi Arabia and Russia each cutting 2.5 million bpd and Iraq cutting over one million bpd.
- issacjohn@khaleejtimes.com

Issac John

issacjohn@khaleejtimes.com