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G20 ministers meet to endorse Opec-Russia deal to slash oil production

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G20 ministers meet to endorse Opec-Russia deal to slash oil production

Oil

G20 ministers meet to endorse Opec-Russia deal to slash oil production

Prices slip as traders fear 10m b/d reduction will not offset record demand collapse

© FT Montage

Opec and Russia have agreed to make deep cuts to oil production, ending a weeks-long war for market share that put further pressure on prices already squeezed by the biggest demand collapse in history.

The group will now hope for a contribution from G20 countries, including the US and Canada who meet on Friday, as countries race to shore up an industry that has been ravaged by the coronavirus pandemic.

The market’s reaction was punishing late on Thursday, with oil prices falling sharply after details of the proposed deal emerged ahead of the meeting of oil ministers that concluded in the early hours of Friday.

An Opec official said talks to ratify the deal to cut 10m barrels a day of production, or roughly 10 per cent of global supply, would continue at the meeting of G20 energy ministers on Friday.

Global benchmark Brent crude oil reversed a near-11 per cent rally to close down 4 per cent at $31.48 a barrel on Thursday, as traders doubted the cuts would make up for the fall in demand resulting from the viral outbreak and questioned whether non-Opec producers would contribute. Markets are now shut until Tuesday.

The oil producers agreed in principle a production cut of 10m b/d from next month — by far the biggest supply deal in history — following pressure from US president Donald Trump. The cuts would diminish over time, ending in April 2022, according to the plan.

“A 10m b/d headline cut begs some hard questions,” said Bill Farren-Price at RS Energy Group. “The biggest one is — why would Russia and Saudi Arabia continue to underwrite the US shale patch at considerable cost to their own exports and with little guarantee on the price impact of such a move? This will put even more pressure on the US to pledge its own cuts at the G20.”

But one sticking point to finalising the deal is Mexico’s refusal to substantially constrain its production, according to people familiar with the talks, which led to the meeting running over. Rocío Nahle García, Mexico’s energy minister, left the online meeting before it concluded and later said on Twitter that she had proposed a 100,000 b/d reduction, or less than 10 per cent of the country’s output.

Mexico has worked with the Opec+ alliance since 2016, but has targeted boosting its production after years of decline. Analysts said it was unlikely Mexico’s absence would derail the deal, but could lead to its expulsion from Opec+. 

Saudi Arabia and Russia, the two biggest producers in the deal, agreed between them to cut about 5m b/d. Other Opec+ producers agreed to remove an additional 5m b/d. The cartel called on the US and Canada, among other countries, to agree to cut another 5m b/d at the extraordinary G20 meeting on Friday.

Ahead of the G20 talks, Mr Trump said he had spoken with Saudi Arabia’s King Salman and Russian president Vladimir Putin on Thursday evening, adding that Opec+ countries were “close to a deal”. 

On oil prices, he said: “I think it’s really hitting bottom,” adding: “We’ve had a tremendous day,” referring in part to the energy talks. 

While hopes for a global supply deal have supported prices for the past week, traders sold as the outcome became clearer, judging it would not be enough to offset the loss of nearly a third of global consumption as a result of lockdowns and travel bans. Global demand was more than 100m b/d before the pandemic.

Mohammad Barkindo, Opec secretary-general, described the virus as an “unseen beast” that had created a “horrifying” supply and demand outlook for the industry “beyond anything we have ever seen before”.

Brent crude at one stage rallied to a high of $36.40 a barrel shortly after the meeting started, on reports Russia and Saudi Arabia could lead the cartel in cuts of as much as 20m b/d.

Instead, Riyadh and Moscow — which traded barbs in the days leading up to the videoconference — agreed after several hours of discussion to cut output by about 23 per cent, from a baseline of 11m b/d. Before the price war began, Saudi Arabia was producing about 9.7m b/d, but swiftly ramped up supply to a record high of 12.3m b/d.

Under the proposal, the cuts would gradually ease, with 10m b/d removed through May and June, before cuts drop to 8m b/d to the end of the year and 6m b/d thereafter until April 2022.

The failure to prop up the market will spread further fear in an industry struggling to adapt to a more than 50 per cent drop in prices since the start of the year.

The US shale sector faces widespread bankruptcies, while the wider industry fears forced shutdowns of production, which can cause long-term damage to fields. Storage capacity is predicted to be overwhelmed globally within months.

At the same time, the budgets of poorer producers such as Nigeria and Angola have been hit hard just as they need to fund their response to coronavirus.

Mr Trump put pressure on Russia and Saudi Arabia to forge a pact to cut 10m-15m barrels a day of output, decrying the price war launched last month. Riyadh and Moscow have insisted that other countries, including the US, participate in the new deal.

US benchmark West Texas Intermediate posted a peak-to-trough swing on Thursday of more than $5 a barrel, hitting a high of $28.36 before falling to $23.24, down more than 5 per cent on the day.

The full details of the final deal, expected to be announced after the G20 meeting, have the potential to further unnerve markets, with many traders fearing a diplomatic fudge.

Helima Croft at RBC Capital Markets said she expected any deal would “yield a broad framework agreement to curb output by a big headline number.” But she said it was likely to “be short on hard specifics such as duration, implementation timeline, and enforcement mechanisms”.

Additional reporting by Najmeh Bozorgmehr in Tehran and Aime Williams in Washington

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