(CNBC) A record oil production cut hangs in the balance after energy ministers from the Group of 20 major economies on Friday agreed that stabilization in the market is needed but stopped short of discussing specific production numbers.
“To underpin global economic recovery and to safeguard our energy markets, we commit to work together to develop collaborative policy responses,” a press release said. “We recognize the commitment of some producers to stabilize energy markets. We acknowledge the importance of international cooperation in ensuring the resilience of energy systems.”
The energy ministers’ meeting came one day after oil producer group OPEC and its allies — in their own emergency meeting — proposed taking a record 10 million barrels per day of crude off the market.
In a marathon video meeting that lasted for more than nine hours on Thursday, all members of OPEC and its allies, commonly known as OPEC+, agreed to the cuts apart from Mexico. This means the cut, which amounts to roughly 10% of global supply, is still subject to the country’s approval.
On Friday President Donald Trump said the U.S. would cut production in an effort to get Mexico “over the barrel.”
Mexico’s portion of the OPEC cut amounts to 400,000 bpd, which the country refused. Following Thursday’s meeting, Mexico’s Secretary of Energy Rocío Nahle said the country would be willing to take 100,000 bpd offline.
At a White House press briefing on Friday, Trump said he spoke to Mexico’s President Andrés Manuel López Obrador and had agreed to “pick up some of the slack” by cutting production on behalf of Mexico. He did not elaborate on how the cuts would be enacted and said Mexico would reimburse the U.S. at a later date.
Trump has sought to ease relations between Saudi Arabia and Russia since a price war broke out between the two powerhouse producers following OPEC+’s meeting on March 6. The OPEC+ meeting was scheduled after Trump said he spoke to Putin and Saudi Crown Prince Mohammed bin Salman and expected them to announce a deal.
While Trump has previously stopped short of saying the U.S. would scale back production, he has noted that market forces would naturally curb output.
U.S. Energy Secretary Brouillette reiterated this point on Friday, saying that about two million bpd of U.S. production would have been taken offline by the end of the year, with the number potentially as high as three million.
“Today’s crisis transcends the interests of any one nation and requires a swift and decisive response from us all. Failure to act has far reaching consequences to each of our economies,” he said Friday in prepared remarks at the G20 meeting. “This is a time for all nations to seriously examine what each can do to correct the supply/demand imbalance,” he added.
OPEC+’s proposed cut was not contingent on nations outside of the group curbing output, although the expectation is that there will be global efforts to prop up the market. The coronavirus-induced demand loss has sent oil prices tumbling to near two-decade lows.
Following the G20 meeting Russia’s Energy Minister Alexander Novak said he expected nations outside the group to cut production by an additional 5 million barrels per day, according to Reuters.
At the G20 extraordinary meeting, hosted by Saudi Arabia, the group agreed to set up a focus group to monitor countries’ efforts to curb production.
What did OPEC+ propose?
Led by Saudi Arabia and Russia, on Thursday the group outlined a cut of 10 million bpd from May 1 for an initial period of two months through to June 30.
For the subsequent six months, OPEC+ said in a statement that from July 1 through to December 2020, the total adjustment agreed would amount to a cut of 8 million barrels per day.
Thereafter, for a period of 16 months through to April 30, 2022, the cuts would amount to 6 million bpd.
The suggested cuts were far larger than any deal OPEC+ has ever agreed on before, but many are concerned it won’t be enough to prop up prices with the market already awash with crude.
“Covid-19 is an unseen beast that seems to be impacting everything in its path,” OPEC Secretary General Mohammad Barkindo said at the meeting. “For the oil market, it has completely up-ended market supply and demand fundamentals since we last met on 6 March,” he added.
U.S. West Texas Intermediate fell 9.29%, or $2.33, to settle at $22.76 per barrel on Thursday evening. International benchmark Brent crude slipped 4.14% to settle at $31.48, after earlier hitting a high of $36.40. The market was closed on Friday.
Both Brent and WTI futures are in bear market territory, down 53% and 63% respectively since climbing to a January peak.
“The reported OPEC+ production cut of 10 million barrels per day just isn’t enough to plug the 15- to 20-million b/d near-term imbalance in the marketplace and avoid tank tops in May,” Chris Midgely, S&P Global Platts’ global head of analytics, told CNBC in an email. The cut “won’t be enough to bring sustainable, restorative support to oil prices, not unless OPEC goes further,” he added.
That said, Ann-Louise Hittle, vice president of macro oils at Wood Mackenzie, noted that the deal “will make a difference to the market,” even if “poorly implemented.”
“We expect the second half of 2020 to show an implied stock draw, in contrast to the record-breaking oversupply of the first half of 2020,” she said.