A historic multilateral deal to lower global oil production and stabilize prices, led by record cuts from Saudi Arabia and Russia, is at risk of collapse after Mexico refused to sign up.
The impasse casts doubt on efforts to revive the market from a debilitating coronavirus-induced slump. The deal by the coalition of nations known as OPEC+, which dwarves s previous interventions and has 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.
Speaking at a press conference on Saturday morning, Mexican President Andres Manuel Lopez Obrador said he had talked to Trump and had reached a deal with OPEC+, but it wasn't immediately clear if his position had shifted.
Saudi Arabia made the whole deal dependent on Mexico's participation, pinning an accord to remove more than 10% of global production from the market on an argument about a few hundreds of thousands of barrels. But Riyadh's energy minister, Prince Abdulaziz bin Salman is determined the burden of cuts must be shared as widely as possible.
Attention now turns to Friday's meeting of G-20 oil ministers, chaired by Saudi Arabia, where countries outside OPEC+, including the U.S., are expected to make commitments to support oil markets. It presents another chance to bring pressure on Mexico. Failure to nail down a deal would likely see oil prices slump again on Monday and could revive the monthlong war for market share between Saudi Arabia and Russia.
"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.
In a sign that the the diplomatic push for a deal would continue at the highest levels, Russian news agency Tass reported that President Vladimir Putin would make more calls on the issue today. He held a three-way conversation with President Trump and Saudi Arabia's Mohammed bin Salman yesterday.
The tentative deal would result in cuts of about 10 million barrels a day during May and June. Saudi Arabia and Russia, the biggest producers in the group, would each take output down to about 8.5 million a day, with all members agreeing to cut supply by 23%.
It would be the biggest cut in OPEC's history and highlights the depth of the market's crisis. Opening yesterday's meeting, OPEC Secretary-General Mohammed Barkindo described the supply-deman balance as "horrifying." But it will probably buy producers little more than a bit of time.
"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.
The refusal by Mexico's Energy Secretary Rocio Nahle Garcia to accept the proposed cuts reflects her country's determination to keep as close as possible to the production and spending plans it's been pursuing despite the crash. In a Twitter post shortly after leaving the meeting, she said the nation is ready to reduce output by 100,000 barrels a day, far less than the 400,000 barrels a day proposed by the group, and from a higher baseline.
"Mexico can and should join the international community in stabilizing the oil market," said Aldo Flores Quiroga, the former Mexican deputy oil minister who negotiated OPEC+ deals from 2016 to 2018. "The production cut is both necessary and possible. It's the responsible thing to do domestically and internationally."
OPEC+ has been put under intense pressure by Trump and American lawmakers, who fear thousands of job losses in the U.S. shale patch.
While the headline cut equates to a reduction of about 10% of global supply, it makes up just a fraction of the demand loss, which some traders estimate at as much as 35 million barrels a day.
Oil prices have tumbled by half this year as the spread of the coronavirus coincided with a bitter price war that saw producers flood the market. Brent dropped 4.1% to $31.48 a barrel on Thursday, even as the agreement began to take shape. There's no trading Friday in New York or London due to the Good Friday holiday.
Russia has insisted that the U.S. in particular do more than just let market forces reduce its record production. Trump, meanwhile, has said America's cut will happen "automatically" as low prices put shale in dire straits, a sentiment reiterated by his energy secretary Thursday.
OPEC+'s tentative plan would see the output curbs tapering off after two months, depending on the evolution of the coronavirus. The 10 million-barrel-a-day cut may shrink to 8 million a day from July and then 6 million a day from January 2021 to April 2022, according to the OPEC statement. The group is planning another videoconference June 10 to discuss what additional measures need to be taken.
Saudi Arabia and Russia will apply reductions to a production baseline of about 11 million barrels a day, according to the OPEC statement. For Saudi Arabia, that's lower than recent output, which rose above 12 million a day in early April. Other countries would cut from their October 2018 levels.