(Bloomberg) — Negotiators raced to clinch a historic deal to cut oil supply and stem a devastating price rout, as the clock ticked down to a dramatic market open.
OPEC+ ministers met virtually on Easter Sunday afternoon amid signs of progress. After four days of diplomatic wrangling between Mexico and Saudi Arabia, ministers were set to discuss a couple of possible compromises on their videocall, according to delegates. The meeting started late — just four hours before Brent starts trading.
The stakes are high: Prices are already collapsing under the weight of an oil glut that amounts to about a third of the market’s usual size, after the coronavirus pandemic shut down the global economy. That’s threatening the U.S. shale industry, wrecking the budgets of oil-dependent nations and making it harder for central banks to respond to the virus shock.
The Kremlin warned of “unmanageable chaos” if negotiations fail. “The whole world needs this deal,” Dmitry Peskov, spokesman of President Vladimir Putin, said in comments broadcast on Sunday.
The OPEC+ alliance on Thursday agreed a plan to cut its output by 10 million barrels a day — equal to a 10th of global supply. The deal would end the month-long price war between Saudi Arabia and Russia. However, it still needs the approval of Mexico, which is part of the alliance, but so far hasn’t endorsed it.
On the call, delegates said a compromise solution proposed by President Donald Trump last week — initially rejected by Saudi Arabia — would be discussed again. Another idea is to focus on Mexico’s exports rather than production.
Negotiations have escalated to the highest level, with Trump intervening to speak to leaders including Crown Prince Mohammed bin Salman.
Late last week, a deal looked close until Mexico raised objections. Populist president Andres Manuel Lopez Obrador has pledged to restore his country’s oil-pumping prowess with its politically symbolic state oil firm, and so he is reluctant to cut output. Trump offered a compromise — by which U.S. cuts would count as Mexican — but it was rejected by Saudi Arabia. Talks between the kingdom and Mexico continued through the weekend.
Read More: The Secret Weapon That Gives Mexico Power in the Oil Price War
Even if a deal is reached, it may not be enough to put a floor under oil prices. While a 10% reduction in worldwide crude output would be unprecedented, it would barely dent the surplus that continues to build as the virus lockdown spreads. West Texas Intermediate crude slid more than 9% on Thursday — as a deal looked likely — settling below $23 a barrel. Markets were closed on Friday.
Traders will inspect any agreement for details of where real cuts are coming from, and how much of the headline figure might come from moving baselines and reductions that have already been forced on producers by the market.
The tentative OPEC+ deal for a 10 million-barrel cut requires Mexico to reduce its own output by 400,000 barrels a day. The Latin American country has rejected the proposal, instead offering to cut output by just 100,000 barrels.
In an attempt to break the impasse, Trump offered a diplomatic solution that includes some creative accounting, with Mexico counting some of the U.S. market-driven supply decline as its own. According to delegates, most OPEC+ countries back the Trump compromise — even if they acknowledge it’s a face-saving mechanism that doesn’t translate into actual cuts. But Saudi Arabia insisted that Mexico cut its production as much as everyone else.
The OPEC+ alliance initially met on Thursday via video conference, followed on Friday by a virtual gathering of energy ministers of the Group of 20.
The G-20 said it would take “all the necessary measures” to maintain a balance between oil producers and consumers, but it made no commitment toward specific steps on production cuts. Riyadh had wanted the G-20 meeting to yield at least 5 million barrels a day of cut commitments from producers outside OPEC+.
The OPEC+ coalition, comprised of members of the Organization of Petroleum Exporting Countries and allied producers including Russia, had been voluntarily curbing output since 2017. The alliance began to crumble last month when Saudi Arabia and Russia couldn’t agree on deeper production curbs to offset the impact of the virus. Saudi Arabia responded by launching the price war, and one month on, all sides are seeking a truce.
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