OPEC+ finalises unprecedented deal, compromises on Mexico

OPEC+ agreed to the largest production cut in history, following four days of talks and U.S. pressure to close the deal  despite a lesser contribution from Mexico.

As demand is hammered by pandemic-induced lockdowns around the world, OPEC+ decided the group’s crude oil cuts will be 9.7 million barrels per day (bpd) for the next two months with lesser cuts until April 2022, OPEC announced after Sunday night’s emergency meeting.

In Thursday’s OPEC+ meeting, Mexico said it would cut production by just 100,000 bpd, instead of the 400,000 bpd of its fair share equal to 23 per cent of every country’s contribution. Although U.S. offered to contribute with 250,000 bpd reduction on Mexico’s behalf, the mechanism of this was unclear and also unsuccessful in budging Saudi Arabia to agree until after U.S. upped its diplomatic pressure on the Kingdom during the weekend.

In Sunday night’s emergency OPEC+ meeting, the group agreed to a slightly lower production cut from the proposed 10 million bpd, as it adjusted for Mexico’s shortfall.

Brent crude price recovered to $32.84, the level touched before Thursday’s OPEC talks started, with the tepid gains suggesting the cuts were not enough.

“Even though OPEC+ has decided to attempt to bail out the global oil market, the group has unfortunately only come up with half of the ransom money. We believe the market’s disappointment will reflect in prices already from April due the lack of size and the speed of the supply removal,” said Bjornar Tonhaugen, head of oil markets at Rystad Energy.

“At least the global oil market may not exhaust the storage capacity as early as it would without the voluntary production cuts. The oil market will see enormous stock builds in April as the deal is only in effect from 1 May, while gradual shut-ins and production declines will already happen during the current month,” he added.

After the first two months starting May, the OPEC+ group will cut output by 7.7 million bpd for the following six months and then by 5.8 million bpd for 16 months until April 2022.

The baseline for calculating cuts it’s the oil production of October 2018, except for Saudi Arabia and Russia who both have the same baseline of 11 million bpd.

Separately, Russian energy minister Alexander Novak suggested some countries part of the G-20 meeting of ministers, could contribute to an additional 5 million bpd cuts, although no officials figures have been disclosed by the likes of Canada, Norway and Brazil.

“Canada said that they will cut oil output by around 1 million barrels per day. The United States, Norway, Argentina and others said they would cut output as well," Novak has said.