A global deal to slash oil production is at risk after Mexico objects

Russia and Saudi Arabia have called off their brutal price war and are now pushing dozens of major crude producers toward a deal that would slash production and help stabilize a market that's been rocked by the coronavirus pandemic.

4/10/2020 1:40:00 PM

Russia and Saudi Arabia have called off their brutal price war and are now pushing dozens of major crude producers toward a deal that would slash production and help stabilize a market that's been rocked by the coronavirus pandemic.

Russia and Saudi Arabia have called off their brutal price war and are now pushing dozens of major crude producers toward a deal that would slash production and help stabilize a market that's been rocked by the coronavirus pandemic.

But there was a major snag: Mexico has declined to support the agreement, and meeting participants said acknowledged in astatementthat final agreement is conditional on the country's consent. Another round of talks between the Group of 20 is scheduled for Friday.

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Earlier Thursday, a senior OPEC source told CNN Business that Mexico expressed reservations about the scale of their cut and the length of the agreement. While the most severe cuts are only scheduled to last until the end of June, production cuts in some form would last until 2022.

Even if the deal is finalized, the decline in production would amount to only about 10% of the world's normal supply of oil, far below the estimates for how much demand for oil has collapsed in the wake of the coronavirus crisis. And it is unlikely to stem the massive plunge in oil prices in recent months.

Attention now turns to the meeting of G20 energy ministers, who are scheduled to meet at 8 a.m. ET."to foster global dialogue and cooperation to ensure stable energy markets and enable a stronger global economy." The group, which includes Mexico, could consider production cuts.

Oil producers are desperately seeking to boost prices after Saudi Arabia and Russia abandoned years of production cuts in early March, launching a price war by flooding the market with crude. A massive drop in demand for energy caused of the coronavirus pandemic pushed prices even lower.

A hemorrhaging industryThursday's meeting began with OPEC Secretary General Mohammad Sanusi Barkindo sounding the alarm about both oil prices and demand."For the oil market, [the coronavirus] has completely up-ended market supply and demand fundamentals since we last met on March 6," he said, according to a transcript of the remarks."Our industry is hemorrhaging; no one has been able to stem the bleeding."

Barkindo said that projections call for demand of nearly 12 million fewer barrels per day in the current quarter."These are staggering numbers! Unprecedented in modern times," he said.At that rate,"Given the current unprecedented supply and demand imbalance there could be a colossal excess volume of 14.7 million barrels a day in the second quarter of 2020," he said.

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Even those dire forecasts may be too optimistic, as they could underestimate how much demand has fallen with harsh restrictions on travel, work and public life now in place in much of the world because of the pandemic.Tom Kloza, the chief oil analyst for the Oil Price Information Service, said he believes demand is down as much as 18 million to 20 million barrels a day."This cut is woefully inadequate to stabilize prices into at least the summer," he said Thursday.

The deal would see the output reduced to 8 million barrels a day from July to December followed by a 6 million barrels a day reduction from January 2021 to April 2022. ​Iran, Libya and Venezuela would be exempted from the output cuts due to sanctions or lost production.

Oil futures had started Thursday higher on reports that there would be an agreement to cut up to 15 million barrels a day. As the day wore on, though, doubts emerged that the cut would be that large and prices closed slightly lower.Hopes for a dealThursday's emergency meeting, which was called by Saudi Arabia, followed pressure by US President Donald Trump, who last week called on Saudi Arabia and Russia to deliver big production cuts.

Trump said he spoke with Russian President Vladimir Putin and King Salman of Saudi Arabia Thursday to discuss oil production.Dozens of US oil companies are facing bankruptcy due to the collapse in oil prices and Trump said that he anticipates worldwide layoffs in the oil industry.

"The numbers are so low that there will be layoffs all over the world, there will be certainly layoffs in this country and we don't want that to happen," Trump said.Trump said he hopes there will be a deal worked out to cut oil production."We'll see what happens but as you know OPEC met today and I would say they are getting close to a deal," said Trump.

CNN's Jason Hoffman and Chris Liakos contributed to this report. Read more: CNN Philippines »

It was not a war, but a strategy to obtain all oil producers to agree on production cuts in order for fair market prices. It works.

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