G20 energy ministers held virtual talks Friday as major oil producers scrambled to finalise output cuts to shore up prices, with Mexico announcing a deal with the United States that could end an impasse.
Mexico was the lone holdout in an OPEC-led agreement reached after marathon overnight talks that would see output slashed by 10 million barrels per day in May and June and the cuts would gradually be reduced until April 2022.
The standoff had cast doubt on efforts to bolster oil prices, pushed to near two-decade lows by the demand-sapping coronavirus pandemic and a Saudi-Russia price war that rattled global markets.
The G20 talks, hosted by top exporter Saudi Arabia, are expected to seal the deal more widely with non-OPEC countries in the group including Mexico, the United States and Canada.
Under the OPEC deal, Mexico was expected to cut production by 400,000 barrels per day but the country resisted during the overnight talks and demanded the reduction be limited to 100,000.
Speaking to reporters later Friday, Mexico’s President Andres Manuel Lopez Obrador said he had reached an agreement with his US counterpart Donald Trump to cut production by 100,000 bpd.
He added that Trump had agreed to cut US production by 250,000 bpd “as compensation” for Mexico.
There was no immediate comment from Trump, and it was unclear whether the OPEC oil cartel and its allies would agree to the Mexico-US deal.
The production cut agreement hinges on Mexico’s consent for it to take effect, the Organization of the Petroleum Exporting Countries said early Friday after an hours-long meeting.
The tentative deal marked a possible end of the price war between Russia and Saudi Arabia, which both took on the lion’s share of the cuts as they agreed to slash output to around 8.5 million bpd, according to Bloomberg News.
“Our global energy systems, from producers to consumers, is in uncharted territory and it is our responsibility to find the path forward,” Saudi Energy Minister Prince Abdulaziz bin Salman told the G20 gathering.
“Saudi Arabia urges all G20 members, including Mexico, as well as invited countries to take appropriate and extraordinary measures to stabilise market conditions.”
– ‘Ghostly spectre’ –
Russian Energy Minister Alexander Novak also urged the G20 ministers to act in a spirit of “partnership and solidarity”, according to a local television station.
OPEC Secretary General Mohammad Barkindo warned the global crude storage capacity would be exhausted before the end of May because of a supply glut and a “jaw-dropping” drop in demand.
“There is a ghostly spectre encircling the oil industry,” Barkindo told the ministers.
“We need to act now, so we can come out of other side of this pandemic with the strength of our industry intact.”
The impact of the cuts on prices was not immediately clear as the global oil markets were shut on Friday for the Easter weekend.
But Stephen Innes, an analyst at AxiCorp, said the supply cuts were “less than the market hoped for” given the hit to demand from coronavirus lockdowns throughout the world.
“The deal currently tabled will only partially offset oil price distress, but that’s what it was supposed to do. Still, the storm clouds for oil prices will only completely dissipate when lockdowns are lifted,” he said.
– ‘Deep abyss’ –
Rystad Energy also said the cuts were not enough to restore market equilibrium.
“The proposed 10 million bpd cut by OPEC+ for May and June will keep the world from physically testing the limits of storage capacity and save prices from falling into a deep abyss,” the energy research firm said.
“But it will still not restore the desired market balance.”
Oil prices have slumped since the beginning of the year due to the COVID-19 pandemic.
Compounding the problem, Riyadh and Moscow had both ramped up output in a bid to hold on to market share and undercut US shale producers.
Trump had expressed optimism about the prospects for an agreement — even as the talks appeared to be at an impasse.
While the US is not in the OPEC or OPEC+ groups, it is supportive of a reduction in supply in order to stabilise prices and breathe new life into its shale industry.
Fresh from a conference call with Russian President Vladimir Putin and Saudi Crown Prince Mohammed bin Salman, Trump told a press briefing at the White House Thursday that a deal was “close”.
Shale has transformed the US into the world’s top producer, but the industry cannot sustain its high cost base as prices collapse.
Yet the US oil sector appears reluctant to trim production, having extracted a near-record 13 mbpd in the final week of March. This fell to 12.4 mbpd last week.
