Mexican makes OPEC production cuts on hold

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News-The members of OPEC+, a group that includes Russia, reached a tentative agreement during a virtual meeting on April 9 to temporarily cut production. However, talks stalled late on April 9 when Mexico balked at the suggested production cuts. OPEC+ said in a statement the deal was conditional on Mexico’s consent.

Oil Markets were closed for the Good Friday holiday in major centers. But on April 9, Brent oil prices LCOc1, which hit an 18-year low last month, were trading around $32 a barrel, half their level at the end of 2019, Reuters reported.

OPEC+ outlined a cut of 10 million barrels per day from May 1 for an initial period of two months through to June 30. That meeting is to be followed by a meeting of G20 Energy Ministers on April 10. At that meeting, other countries, principally the United States, will be asked to contribute to the global oil production cut.

Alexei Kokin, a senior oil and gas analyst at UralSib Financial Corp in Moscow, told New Europe on April 6 the OPEC+ deal is not going to be enough to balance the market. “All you can do is slow down the inventory accumulation so that storage capacity stays or will slow so no one has to stop production because there is nowhere to store the oil. So that kind of thing can be achieved with a short-term cut,” he said. He noted that even with a cut of 10 million barrels per day, the excess production still exists. “But it’s just hopefully manageable so no one has to stop producing because there is nowhere to put the oil that can’t be sold,” Kokin said.

The US Administration of President Donald J. Trump has encouraged global cooperation to bolster an oil market that crashed as the COVID-19 pandemic accelerated in March and OPEC+ failed to agree on a deal on March 6 leading to an oil price war between Riyadh and Moscow.

Following OPEC+ talks on April 9, OPEC, Russia and other allies outlined plans to cut output by more than a fifth and said they expected the US and other producers to join in their effort to bolster prices, Reuters reported. In a separate phone call after the meeting, Saudi Arabia’s King Salman, Trump and his Russian counterpart Vladimir Putin reviewed the importance of cooperation between oil producing countries, Saudi state news agency SPA reported.

Chris Weafer, co-founder of Macro Advisory in Moscow, wrote in a note to investors on April 8 that neither Russia nor Saudi Arabia will agree to large cuts without participation by the US producers. “US market share is the problem. While the initial deal failure, on March 6th, was due to a disagreement between Moscow and Riyadh, the core issue now is that US producers have taken advantage of previous OPEC+ deals and substantially increased their global oil share over the past ten years from 9% to 18%,” he wrote.

According to Weafer, if the agreed cuts total only 10 million barrels per day, then the price of Brent will slide back under $30 per barrel, also quickly. If the total agreed cut is 15 million barrels per day then there may be a small bounce. But, given that it is expected that demand will fall by 30-35 million barrels per day this quarter, a 15 million barrel per day cut will not provide price support for long, Weafer wrote, adding that slower fall back below $30 per barrel would be more likely.

The US has few options to participate, Weafer said, explaining that the US oil industry is fragmented and not controlled by the government. It is reported that US production has fallen by almost 2 million barrels per day because of the steep oil price fall. “The US may ‘contribute’ this as its contribution. Otherwise, the government could buy oil for its strategic oil reserves and in that way reduce the commercial supply,” Weafer wrote.

The medium-term oil price rally will also depend on US production, he wrote. “US production has been cut, and will stay under pressure, so long as the oil price remains low. But, if oil rallies strongly, for example to $45 per barrel, then US production would recover and the White House could not intervene,” Weafer wrote and added: “That suggests that the oil price recovery potential is capped at that level at least until the global economy fully recovers and oil demand again exceeds 100 million barrels per day.”