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After two days of high drama, low farce and long periods of tedium, the OPEC+ group of countries, led by Saudi Arabia and Russia, almost agreed to cut their oil production by an initial 10 million barrels a day in response to the coronavirus-triggered collapse in demand. That “almost” is important.
The drama was provided by Mexico refusing to accept its allotted cut. The farce followed when the country’s oil minister left the virtual OPEC+ meeting to hold separate talks with her U.S. and Canadian counterparts, while the other energy ministers agonized for hours over how to respond. The tedium? Well, that was just the bits in between.
Mexico was asked to cut 400,000 barrels a day of production in the first phase of an OPEC+ deal that would run for an unprecedented two years. It offered one-quarter of that, and from a slightly higher baseline than what was asked for.
An unlikely white knight appeared to ride to the group’s rescue on Friday in the form of U.S. President Donald Trump. He proposed an arrangement with Mexico’s President Andres Manuel Lopez Obrador (known as AMLO) in which 250,000 barrels a day of the “market-driven” decline in U.S. output would be rebranded as “Mexican.” But don’t be fooled: This won’t take a single additional barrel of oil off the market beyond those that would disappear anyway because of the Covid-19-prompted collapse in demand. That’s why this is still an “almost” deal, rather than a certain one: The Saudis and the Russians still have to decide whether they will swallow Mexico’s lack of genuine commitment.
In fairness, the OPEC+ deal is grand in its scope, given the size of the cuts and their duration. The 20 producers taking part will initially cut output by 10 million barrels a day, or 23%, for two months — May and June. That will then be tapered to 8 million barrels a day until the end of the year, and then reduced to 6 million barrels for another 16 months, until April 2022.
Bloomberg
Bloomberg
The deal raises some even bigger questions than Mexico. Russia, for example, is to cut its output by 2.5 million barrels a day over the next three weeks. Really? Igor Sechin, head of state-controlled oil company Rosneft, was a fierce critic of Russia’s modest contribution to previous reductions. I can imagine how he’ll react when he’s told his company has to cut output by almost 1 million barrels a day by May 1.
The contribution from Friday’s meeting of G-20 energy ministers — which followed Thursday’s marathon OPEC+ call — was, to put it mildly, underwhelming. India’s minister mentioned filling the country’s strategic oil reserve, but there were no concrete new offers from the group.
With oil prices on the floor, building up reserves makes sense anyway, and China and India have already started. But storage space is limited.
The U.S. has room for another 77 million barrels in its Strategic Petroleum Reserve, but Congress refused last month to approve the budget for an initial 30-million-barrel purchase. Oil traders and analysts estimate that China could buy an extra 80 million to 100 million barrels this year. Meanwhile, the Indian government is asking state-run refiners to buy 15 million barrels of crude from Saudi Arabia, the United Arab Emirates and Iraq to fill its tanks. Beyond those three countries, there’s little storage capacity elsewhere.
U.S. Energy Secretary Dan Brouillette told the G-20 meeting that the oil market collapse will impose some 2 million barrels a day of American output cuts by the end of the year without any government intervention. Some predictive models, he added, see the drop as big as 3 million barrels. Russia previously rejected such “free market” cuts, arguing that production falling in response to a lack of demand is not an output reduction. But in the end it capitulated, along with the other OPEC+ countries. There was no mention in the OPEC+ communique of the deal being dependent on the actions of anyone else outside the group.
Inside the group, there’s still the Mexican problem to solve. Russia’s similar refusal to make deeper cuts in March led to the collapse of the last OPEC+ production deal and prompted the start of Saudi Arabia’s retaliatory output surge. Will Mexico’s refusal do the same? As I wrote this, the OPEC+ countries were still struggling to find a solution.
It seems they have three choices:
- Pretend to believe the Trump-AMLO arrangement will deliver real cuts, and press on as if nothing’s happened.
- Wave goodbye to Mexico, which has never delivered meaningful cuts anyway, and announce a 9.6 million-barrel-a-day cut.
- Continue the output surge.
If they ratify some form of the agreement, this will be the second time in less than five years that Saudi Arabia’s attempt to pursue a pump-at-will policy has collapsed. After just one month, this one has lasted an even shorter time than the previous effort, brought to an end by the OPEC+ deal with Russia and other countries toward the end of 2016.
But these are quite clearly extraordinary times, with an unprecedented demand collapse. Don’t be surprised if the war over market share between the Saudis, the Russians and the Americans resumes once the lockdowns ease and people want oil again. This is probably a temporary truce rather than genuine peace between the three biggest producers.
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