Explained: Has Mexico derailed a potential armistice in the Saudi-Russia oil war?

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G20 energy ministers completed a marathon meeting yesterday to discuss oil market stability that culminated in a pledge to work together but stopped short of specifying production cut numbers.

The meeting followed a 10 million barrel per day (bpd) output cut agreement between Organization of Petroleum Exporting Countries (OPEC), Russia, and others, known as the OPEC+ group, on Thursday. The agreement hit an impasse, however, with Mexico refusing to adhere to a 400,000 bpd cut.

An oil output deal is crucial to solving the market’s chronic oversupply problem. Saudi Arabia has made it clear that any deal is contingent on all global producers cutting output in tandem, including the US and Canada.

Oil prices have plummeted from $66 to $31 since the start of the year after a drop in demand caused by the coronavirus was exacerbated by OPEC’s failure to reach a consensus on production cuts, causing a surge in supply.

Russia failed to agree to a fresh round of output cuts in early March as prices began to fall due to coronavirus demand loss. The decision triggered an oil price war, plunging prices further.

“We commit to ensure that the energy sector continues to make a full, effective contribution to overcoming COVID-19 and powering the subsequent global recovery,” the G20 said in a statement following Friday’s meeting.

However, members did not discuss specific numbers, according to Canadian Natural Resources Minister Seamus O’Regan.

Saudi Energy Minister Prince Abdulaziz bin Salman noted that energy affordability and stability will be a key factor in facilitating a global economic recovery from the coronavirus pandemic.

“Having [an] affordable, reliable, accessible energy supply is considered a necessity to enable basic services, including health care, and help our efforts in assisting economic recovery,” Prince Abdulaziz said in opening remarks during the meeting.

In a separate phone call after Thursday’s OPEC meeting, Saudi Arabia's King Salman, US President Donald Trump, and Russian President Vladimir Putin reviewed the importance of cooperation between oil producing countries, Saudi state news agency SPA reported.

“Desire was confirmed for coordination of actions aimed at the stabilization of the global oil trade situation and the mitigation of the negative impact from volatile oil prices on the global economy,” the Kremlin said, following the call with other producers.

After it had been Russia that was stalling, Mexico is now the lone holdout in the OPEC+ deal. During Thursday’s talks, Mexico proposed reducing its oil output by 100,000 barrels per day (bpd) in the next two months, and would reduce output to 1.681 million bpd from 1.781 million bpd reported in March, Energy Minister Rocio Nahle said in a tweet on Thursday. Mexico had been asked yesterday to cut its production by 400,000 bpd.

“I hope (Mexico) comes to see the benefit of this agreement not only for Mexico but for the whole world. This whole agreement is hinging on Mexico agreeing to it,” Saudi Energy Minister Prince Abdulaziz bin Salman told Reuters by telephone.

It is not clear under which mechanism US authorities can authorize a cut, but Mexican President Andres Manuel Lopez Obrador said he had reached an agreement with Trump to cut production by only 100,000 bpd.

“First they asked us for 400,000, then 350,000,” he said. Trump has “very generously expressed to me that they were going to help us with an additional 250,000 to what they are going to contribute. I thank him,” López Obrador added.

If the deal is not signed, the alternative is prices falling further, with the market’s oversupply problem exacerbating significantly as time goes on.

“Should the whole deal fall apart, the result will be obvious, oil will collapse on Monday and I would expect Brent to fall to near $25 a barrel, possibly lower,” said Jeffrey Halley, senior market analyst at trading firm OANDA.

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