After OPEC+ pact, G20 nations try to nail broader oil deal

A broader agreement seeking a 15 percent drop in global crude production would still leave a severe supply overhang.

The Organization of the Petroleum Exporting Countries (OPEC), its headquarters in Vienna, Austria, pictured, and its allies agreed to curb output on Thursday ahead of a meeting with G20 Ministers on Friday to try to get others to agree to more cuts [Leonhard Foeger/Reuters]
The Organization of the Petroleum Exporting Countries (OPEC), its headquarters in Vienna, Austria, pictured, and its allies agreed to curb output on Thursday ahead of a meeting with G20 Ministers on Friday to try to get others to agree to more cuts [Leonhard Foeger/Reuters]

Saudi Arabia, Russia and their allies will press Mexico on Friday to join an accord for collective oil production cuts equivalent to 10 percent of global supplies and will push the United States and other producers to remove a further 5 percent.

Nailing an output cut plan tops the agenda for Friday’s video conference of energy ministers from the Group of 20 (G20) major economies, after Moscow, Riyadh and others in the OPEC+ group forged a deal in marathon talks on Thursday, only to have it stumble when Mexico baulked at the initiative.

During opening remarks, Saudi Arabia’s energy minister told the G20 that ensuring affordable energy supply is key to facilitating a global economic recovery from the ravages of coronavirus. 

“Having affordable, reliable, accessible energy supply is considered a necessity to enable basic services, including healthcare, 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.

Measures to prevent the spread of coronavirus such as shuttering factories and closing borders have severely curtailed global oil demand. Into this mounting supply glut, Saudi Arabia unleashed an oil price war last month after it failed to persuade Russia to agree to deep output cuts. 

That price war unleashed a deluge of crude into already oversupplied markets as Moscow and Riyadh battle for market share.

The resulting price crash has whacked higher-cost producers including US shale oil companies – many of which took out loans to finance the drilling of new wells.

Faced with the collapse of the US domestic oil industry, President Donald Trump last week had raised the spectre of slapping sanctions on crude imports from OPEC leader Saudi Arabia, which hosted Friday’s call.

But diplomacy appears to have gained the upper hand.

On Thursday, as OPEC and its allies – a group known as OPEC+ – sought to finalise a new output cut deal after 10 hours of talks via video link, Trump spoke by phone with his Russian counterpart Vladimir Putin and King Salman of Saudi Arabia.

“We had a big talk as to oil production and OPEC and making it so that our industry does well and the oil industry does better than its doing right now,” Trump said.

Speaking at a news conference on Friday, Mexican President Andres Manuel Lopez Obrador said he had spoken to US President Donald Trump and that the US had agreed to make 250,000 barrels per day in additional cuts to its oil output to help Mexico make its own contribution.

“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.

Mexico, which has long been in a standoff with Washington over Trump’s plan to build a wall between the two countries, cares less about low oil prices because of its unique hedging programme, which protects it against price falls.

Markets were closed on Friday for the extended Easter break in major centres. Brent oil prices closed on Thursday at about $32, half its level at the end of 2019 and finding little support despite the unprecedented cuts outlined by OPEC+. US WTI prices closed below $23 per barrel, a level which drives most of the American oil industry into losses.

OPEC+ drew up plans for combined cuts of 10 million barrels per day (bpd) in May and June, with calls by OPEC+ officials for US producers and others to cut a further five million bpd.

Even if OPEC+ secures agreement on those curbs – equal to about 15 percent of global production – it still leaves the market with a huge overhang of supply because crude demand has plunged by as much as 30 percent.

Patching up differences

Oil importing countries could offer some additional support during Friday’s talks by announcing extra purchases of crude for their strategic reserves, International Energy Agency Executive Director Fatih Birol said on Thursday.

But there is only so much importers can buy when the world’s storage capacity on land and at sea is rapidly filling up.

In a statement on Friday, Birol said he hoped the G20 talks would “help restore some much-needed stability to oil markets”.

The crisis in the oil market has pushed Russia and Saudi Arabia to patch up differences after their acrimonious OPEC+ meeting in March where a dispute over how best to tackle falling prices led them to scrap their existing pact on production restraint that had helped balance the market for three years.

The Kremlin said Thursday’s talks showed the desire to coordinate for “the stabilisation of the global oil trade situation and the mitigation of the negative impact from volatile oil prices on the global economy”.

But a final push by OPEC+ to close the deal on Thursday tripped when Mexico refused to sign up to the plan under which it would cut about 400,000bpd. Mexico said it had proposed a cut of 100,000bpd.

“This whole agreement is hinging on Mexico agreeing to it,” Saudi Energy Minister Prince Abdulaziz bin Salman told Reuters News Agency, adding he hoped it would “see the benefit of this agreement not only for Mexico but for the whole world.

The deal envisaged all members reducing output by 23 percent, with Saudi Arabia and Russia each cutting 2.5 million bpd and Iraq cutting more than one million bpd.

Riyadh and Moscow agreed that their cuts would both be calculated from an October 2018 baseline of 11 million bpd, even though Saudi supplies surged to 12.3 million bpd this April.

Under the plans, OPEC+ would ease cuts to eight million bpd from July to December and relax them further to six million bpd between January 2021 and April 2022, OPEC+ documents showed.

Source : Reuters

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