In advance of the OPEC+ video meeting on Thursday, Russia and Saudi Arabia had an agreement a day ahead on three key elements: 1) 10 million barrels per day (b/d) in total cuts for May and June; 2) compromise that Russia and Saudi Arabia would both cut from a baseline of 11.3 million b/d; and 3) the deal would not be conditional on government mandated cuts from the United States or other non-OPEC+ producers.
We explained in earlier client notes that OPEC was targeting the 10 million b/d and there would be no requirement for the US or others to participate. We didn’t weigh in on the baseline issue because we were confident it would be worked out and not prevent a deal.
In our view, cuts of 10 million b/d are likely to inject some stability in oil prices that currently lack any catalyst or condition for a floor on prices. Yes, it is not enough to counter the global demand decline estimates of 20 to 30 million b/d from the economic shutdown due to COVID-19. OPEC estimates the demand to fall by an average of 6.85 million b/d in 2020. The thinking is that this coordinated action to cut production will keep producers one step ahead of global oil storage hitting maximum levels in Q2 and will start to slowly draw down global stocks in Q3 and Q4. As we said in previous notes, the Trump Administration hopes that that the OPEC+ cuts will mitigate the level of production shut-ins in the US.
As a result, Saudi Arabia and Russia will both reduce production to 8.75 million b/d and all other members of the OPEC+ group will cut production by 22 percent to achieve 10 million b/d in cuts for May and June. After June, the cuts will be reduced to 8 million b/d. In 2021, the cuts will be reduced to 6 million b/d until May 1, 2022 (yes, 16 months and not a typo). See OPEC press release that describes the agreement.
Libya, Venezuela and Iran are exempt from the cuts. See the charts below for new production levels.
There was some grumbling by smaller producers about the across the board 22 percent cut but all recognized the nature of the crisis and agreed to the cuts – except for Mexico.
We are told Mexico initially agreed to participate in the cuts but near the end of the meeting Mexico indicated it could not cut 400,000 b/d per the deal. In previous deals, Mexico had been allowed to offer cuts via natural declines. For nearly 5 hours after every member had already agreed, Mexico resisted and finally proposed to cut only 100,000 b/d.
If Mexico was allowed a lower cut amount, other small producers would have started to renegotiate and the deal would have fell apart.
Saudi Arabia wanted to the deal to be conditioned on Mexico’s participation in cuts and the OPEC press release includes such a provision. One delegate told me late last night “either we all cut or no one cuts.”
When it looked like the deal might fall apart, a call was arranged between President Trump, President Putin and Saudi King Salman. Trump agreed to call Mexican President Andres Manuel Lopez Obrador (AKA AMLO).
On Friday morning, the Mexican President said in his press conference that he had a deal with Trump to cut 100,000 b/d and the US would cut the remainder of Mexico’s cut level in the OPEC+ deal.
The details of the call are unclear from the US side but we are told the arrangement was not acceptable to Saudi Arabia. However, the US continues to talk to Mexico to find a creative way to resolve the remaining obstacle to the 10 million b/d in OPEC+ cuts.
Trump also spoke to President Putin this morning on the oil market situation likely to engage his assistance in helping with Mexico. We are also told that Venezuela actively tried to get Mexico to agree to the deal.
In our view, we highly doubt the deal will fail and that the Mexico issue will be resolved in the next day or so. G20 energy ministers met today by video conference and will propose a task force to monitor global production and demand. The US Secretary of Energy in prepared remarks suggested US production will decline by 2 million b/d in 2020. We don't expect the communique to offer a total cut number from producing countries attending the G20 meeting but we think it is possible for a statement by one of the countries or international agencies in attendance that references a total number of production declines presented today. We think the number could be close to 5 million b/d.
Trump is generally pleased with the OPEC+ deal and we expect he will make comments about it and his conversations with Mexican President during his daily COVID-19 press conference at 1pm ET today.
