The world’s largest oil producers were still grasping for a deal to rescue energy markets from a coronavirus-induced collapse after three days of talks. Mexico remains the last holdout.
An unprecedented reduction of about 10% in worldwide crude output was still being negotiated in bilateral talks Saturday. U.S. President Donald Trump has offered a diplomatic solution that could allow everyone to save face, but it remains unclear whether Saudi Arabia and other members of the global OPEC+ coalition will be amenable to that. Russia has said it considers the plan a done deal.
OPEC+ has made a commitment to cut a record 10 million barrels a day, “conditional on the consent of Mexico.” With Trump now personally involved, the stakes appear too high for the deal to fail. But even Trump acknowledged on Friday that he wasn’t sure if an agreement could be reached. “We are trying to get Mexico, as the expression goes, over the barrel,” Trump told reporters at the White House.
The survival of thousands of oil producers, millions of jobs and the economies of oil-dependent nations are hanging in the balance as the global pandemic wipes out demand in a world awash with crude. Several U.S. shale producers are on the brink of bankruptcy, Russia risks having no place to store its crude, and for all their low-cost production, the Saudis need higher prices to fund the kingdom’s budget.
Oil prices continued to plunge despite talks of a global accord. West Texas Intermediate crude slid more than 9% on Thursday, settling below $23 a barrel, on speculation that a deal to cut production would fail to keep the glut of crude in global markets from swelling as the pandemic paralyzes air and ground travel. Oil markets were closed on Friday due to a public holiday ahead of Easter.
“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 OPEC+ alliance initially met on Thursday via video conference, followed on Friday by a virtual gathering of energy ministers of the Group of 20. The talks on Saturday are largely bilateral between Saudi Arabia and Mexico. Some progress had been made Saturday, but it remained unclear whether a final deal would be reached as Saudi Arabia insists that Mexico cut its production as much as everyone else, delegates said.
A group of Republican senators from oil-rich U.S. states who’ve pressed the Trump administration to take a tougher stance with Saudi Arabia were holding a conference call on Saturday with Saudi officials to press for production cuts. Kevin Cramer of North Dakota and Dan Sullivan of Alaska were among those expected to join the call, according to three people familiar with the matter who asked not to be identified because the meeting is private. Saudi Arabia’s energy minister, Prince Abdulaziz bin Salman, was also expected to be on the call, two of the people said.
Some Republican senators have raised the prospect of cutting off aid to Saudi Arabia if the kingdom doesn’t pare output.
After its meeting on Friday, the G-20 said it would take “all the necessary measures” to maintain a balance between oil producers and consumers, but it made no commitment toward specific steps on production cuts. The communique was watered down from earlier drafts after diplomatic wrangling, notably removing language that said the group would do “whatever it takes” to ensure that the energy sector is contributing to the global recovery from the pandemic.
The OPEC+ coalition, comprised of members of the Organization of Petroleum Exporting Countries and allied producers including Russia, had been voluntarily curbing output since 2017. The alliance began to crumble last month when Saudi Arabia and Russia couldn’t agree on deeper production curbs in response to the coronavirus crisis, triggering an oil-price war between Riyadh and Moscow.
In recent days, after Trump held calls with Russia’s Vladimir Putin and Saudi King Salman Bin Abdulaziz, the two rivals were ready for a deal. That’s when Mexico threw a spanner in the whole process.
Mexico’s Energy Minister Rocio Nahle doesn’t appear to have budged from her insistence that the country could only cut output by 100,000 barrels a day, 300,000 less than its fair share of 23% reductions by everyone in the OPEC+ group. On Friday morning, Mexican President Andres Manuel Lopez Obrador said he had resolved the matter in a phone call with Trump. The U.S. would make an additional 250,000 barrels a day of cuts on Mexico’s behalf.
Trump suggested output cuts American producers have started making to weather the price crash could be counted toward Mexico’s share of the pact. Last week, U.S. production fell by 600,000 barrels a day from a near-record 13 million as shale explorers idle rigs in the Permian Basin of West Texas and elsewhere in the country. That’s almost the equivalent of wiping out Venezuela’s current output.
Energy Secretary Dan Brouillette predicted, at the G-20 meeting, a decline of nearly 2 million barrels a day in U.S. output by the end of this year. Rather than orchestrating actual production cuts, as OPEC+ does, the U.S. is dressing up as cuts what is in reality a market-driven pullback due to the impact of low prices.
Russia appeared satisfied with the unusual math to include part of that as Mexico’s contribution. Kremlin spokesman Dmitry Peskov told reporters in Moscow that Putin considers the OPEC+ deal to be fully agreed and regards it “very positively.”
While there was no indication Saudi Arabia had accepted the proposal, the setback from Mexico appeared relatively small compared with what the kingdom had already fielded. Riyadh had expected the G-20 meeting would win it at least 5 million barrels a day in production-cut commitments from producers outside OPEC+, but the final communique included no figures.
What makes Mexico’s case complicated is that it’s an OPEC+ member, and a concession to the Latin American country in theory creates a precedent within the group.
Mexico has a unique hedging program that has helped it weather price crashes, and its president has a lot at stake. AMLO “understands that doing a symbolic contribution of cuts would be good for the market, would be a good price signal, would boost prices,” said Roger Horn, a senior emerging-market strategist at SMBC Nikko Securities America Inc. in New York. But fixing Mexico’s national oil company Pemex “is a political baby” and cutting output now would be “symbolically really bad for him,” he said.
State producer Saudi Aramco delayed until Sunday the publication of official selling prices for its crude exports for May as the OPEC+ talks continued.