Saudis, Russians Bury Differences,
but Mexico Threatens Oil Deal
By Benoit Faucon, Summer Said and David Hodari (WSJ)
Updated April 9,
2020 10:58 pm ET
Mexico exits talks,
putting oil truce at risk; negotiations to continue Friday
Saudi Arabia and Russia agreed in principle Thursday to lead a 23-nation coalition in massive oil-production cuts after a monthlong feud and a drop in demand due to the coronavirus crisis devastated oil prices. But following more than 11 hours of negotiations, Mexico abruptly exited the talks, jeopardizing a final pact.
Delegates said the talks would continue at a Group of 20 meeting
of energy ministers set for Friday.
Prices shot higher ahead of the Saudi-Russia announcement
before abruptly losing momentum and reversing course. The benchmark U.S. crude
price, for May delivery, ended 9.3% lower on the day at $22.76 a barrel.
Two of the world’s top oil producers joined a coalition of
other countries via teleconference, seeking a solution to the global crude
glut. The meeting includes representatives from 13 countries in the
Organization of the Petroleum Exporting Countries, 10 countries led by Russia,
and a handful of other crude-producing nations.
For Saudi Arabia, the output curbs will involve decreasing
its current production level of 12 million barrels by 3.3 million barrels a
day, while Russia has agreed to cut 2 million barrels a day from its current
production of 10.4 million barrels a day.
Most delegates in attendance agreed to reduce output by a
collective 10 million barrels a day in May and June, OPEC said in a press
release. They would then continue curbs of 6 million barrels a day until April
2022, it said.
But the group said the agreement remains “conditional on the
consent of Mexico.”
Late in Thursday’s proceedings, Mexico, a member of the
alliance, refused to join the cuts, putting the deal in jeopardy, they said.
Mexican officials believe that stronger players in the oil
market, such as the U.S., Russia and Saudi Arabia, should be cutting back more
than Mexico, an oil official in that country said. But as a compromise, Energy
Minister Rocío Nahle said
Mexico had proposed a reduction of 100,000 barrels a day in the next two
months.
Saudi Arabia’s energy minister, Prince Abdulaziz
bin Salman, told the gathering there would be no final deal without resolving
the Mexico issue and talks would continue at a G-20 meeting Friday, the
delegates said. “No deal without Mexico, the Saudi prince said [it] loud and
clear,” said a participant in the call.
Even as the deal looked nearly completed, investors remained
concerned that the cuts might not be enough to support higher prices in the
coming weeks as world-wide lockdowns pummel demand for gasoline, diesel and jet
fuel. The curbs will mitigate some issues in oil markets, “but in a sense, it’s
too little, too late for this month, given the collapse in demand. The boats
are loaded, the pipes are full and the refineries are
cutting runs,” said Saad Rahim, chief economist at commodities trader
Trafigura.
Global oil consumption is on course to plunge by almost 35
million barrels a day in April, according to Mr. Rahim.
As the coronavirus outbreak moves across the world and leads
to travel restrictions and work stoppages, oil consumption is expected to
collapse by as much as 30 million barrels a day this month.
“The supply and demand fundamentals are horrifying,” said OPEC
Secretary-General Mohammed Barkindo. He said the decline in the second quarter
alone would be “close to 12 million [barrels a day] and expanding,” which is
“unprecedented in modern times.”
During the video call, Russian Energy Minister Alexander
Novak said that only coordinated actions by OPEC, Russia and other countries
would achieve results, as oil demand has fallen and storage is filling up
around the world.
The muted market reaction came in that context.
“Maybe the market was betting on a bit more in the volume
than was announced,” said Bjornar Tonhaugen,
head of oil markets at consulting firm Rystad Energy.
“It’s also lacking detail when it comes to the baseline level and whether the
deal hinges on cooperation from other nations outside of OPEC+.”
The Saudi curbs would be the biggest ever on a monthly
basis, said Bob McNally, a former adviser to the White House. They would be the
largest over an extended period since the 1980s, when European and U.S. rivals
flooded the market and its output fell by 6.5 million barrels a day.
Russia and Saudi Arabia hope the U.S. will join in the
production curbs. But their current plan foresees up to 4 million barrels a day
of reduction coming from outside their alliance. The Trump administration has
refused so far to formally take part in any cuts. President Trump has said
reductions will happen because of the coronavirus’s erosion of oil demand.
Mr. Trump said he spoke with Russian President Vladimir
Putin and King Salman of Saudi Arabia on Thursday. He said the three leaders
had “a big talk” about oil production, adding that he wants to avoid layoffs in
the oil industry both in the U.S. and abroad.
“We had a very good talk. We’ll see what happens,” Mr. Trump
said at a White House news conference. He said he believed Russia and Saudi
Arabia were close to a deal but didn’t elaborate. The president didn’t say
whether the U.S. would call on American companies to make production cuts.
OPEC is expected to announce a completed deal on Friday or
Saturday, according to Mr. Trump. The Saudi and Russian leaders “were getting
along very well” during the call, he added. He predicted that oil prices have
already “hit bottom” and are “probably heading up.”
On Thursday, Brent crude, the global benchmark, fell 4.1% to
$31.48 a barrel.
Many U.S. producers welcomed the deal, which they hope will
halt falling oil prices. “It’s a good and necessary first step to restore some
sanity to the global markets,” said Harold Hamm, a friend of Mr. Trump’s and
founder of Continental Resources Inc., an independent shale oil producer. “We
hope [this] signals the recognition that dumping excess oil into the U.S.
market is a losing proposition for all concerned.”
Thursday’s deal-in-principle effectively ends a bruising oil
price war between Saudi Arabia and Russia that saw oil prices fall 55% in
March.
Early last month, Saudi Arabia cut its crude prices and said
it would raise output to record levels after talks with Russia to respond to
the coronavirus outbreak fell through. The effort was an attempt to grab market
share from Russia. But an ensuing oil rout, which sent prices to levels unseen
in 17 years, hobbled many U.S. shale producers.
Saudi Arabia and Russia are now waiting for positive signals
to come from a virtual conference of G-20 countries set for Friday. Key oil
producers such as the U.S., Canada and Brazil are scheduled to attend.
Regulators in Texas—the U.S.’s biggest oil-producing state—are also set to
debate on April 14 whether they will force companies to curtail output.
Instead of the usually crowded room at OPEC’s headquarters
in Vienna, the gathering was virtual to respect social distancing precautions
that have become the norm.
In Vienna, Mr. Barkindo watched Russian energy minister
Alexander Novak speak on a flat-screen TV. In Tehran, Iranian oil minister
Bijan Zanganeh joined from his office with a team of masked officials.
—Georgi Kantchev, Timothy Puko, Andrew Restuccia, Joe
Wallace and Juan Montes contributed to this article.
Write to Benoit Faucon at
benoit.faucon@wsj.com, Summer Said at summer.said@wsj.com and David Hodari at
David.Hodari@dowjones.com