Below is a complimentary excerpt from a research note written today by Hedgeye Energy Policy Analyst Joe McMonigle. Email for access to our institutional research. 

OPEC+ Deal Done to Cut 10 mbd But Mexico Role Needs Resolution - zoil

Trump Calls Mexico to Help Make a Deal

Russia and Saudi Arabia went into the OPEC+ video conference with agreement 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.

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. 

All producer countries attending the OPEC+ conference recognized the nature of the oil market crisis and agreed to the cuts – except for Mexico.

Mexico indicated it could not cut by 22 percent as every other member of the group and would not agree to a 400,000 b/d cut per the deal.  In previous deals, Mexico had been allowed to offer cuts via natural declines.

As the OPEC press release indicates the OPEC+ deal to cut 10 million b/d is conditioned on Mexico’s participation.

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.

The details of the Trump call with Mexico’s President are unclear from the US side but we are told talks are continuing to find a creative way to resolve the remaining obstacle to the 10 million b/d in OPEC+ cuts.

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 upcoming press conferences.