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Top oil producers struggled to finalise production cuts during a virtual summit held by G20 energy ministers on Friday, despite US President Donald Trump’s mediation efforts to end a standoff with Mexico.
The final G20 communique appeared to gloss over simmering divisions over energy policy, making no mention of output cuts and pledging simply to ensure oil “market stability” amid the coronavirus pandemic.
Mexico was the lone holdout in a record OPEC-led agreement reached a day earlier that would see output slashed by 10 million barrels per day in May and June followed by a gradual reduction in cuts until April 2022.
The standoff had cast doubt on efforts to bolster oil prices, pushed to near two-decade lows by the demand-sapping pandemic and a Saudi-Russia price war that rattled global markets.
The subsequent G20 meeting — hosted by Riyadh — was expected to seal the deal more widely with non-OPEC countries in the group including Mexico, the United States and Canada.
But there was no sign of an agreement in the group’s final statement.
“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,” said the statement released early Saturday.
“We commit to take all the necessary and immediate measures to ensure energy market stability.”
US-Mexico agreement
Under the OPEC deal, Mexico was expected to cut production by 400,000 barrels per day but it resisted the suggestion.
Mexico’s President Andres Manuel Lopez Obrador said he had reached an agreement with Trump to cut production by only 100,000 bpd.
He added that Trump had agreed to cut US production by 250,000 bpd “as compensation” for Mexico.
Trump later confirmed the deal, saying the United States will “make up the difference” by cutting “some US production”.
The G20 statement was silent on the Mexico-US deal.
‘Ghostly spectre’
The tentative production cut deal, which hinges on Mexico’s consent for it to take effect, marked a possible end of the price war between Russia and Saudi Arabia.
Both oil producers 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.”
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 (the) other side of this pandemic with the strength of our industry intact.”
‘Storm clouds’
The impact of the tentative deal 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.
Rystad Energy also said the cuts were not enough to restore market equilibrium.
“The proposed 10 million bpd cut 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.”
Slump in prices
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 has expressed optimism about the prospects for an agreement after a conference call with Russian President Vladimir Putin and Saudi Crown Prince Mohammed bin Salman on Thursday.
Putin discussed energy developments separately with Trump and Prince Mohammed again on Friday, the Kremlin said.
While the US is not in the OPEC or the wider OPEC+ groups, it is supportive of a reduction in supply in order to stabilize prices and breathe new life into its shale industry.
Shale has transformed the US into the world’s top producer, but the industry cannot sustain its high cost base as prices collapse.
