A historic production cut agreement between OPEC and its allies, known as OPEC+, hit a roadblock after Mexico refused to agree to its share of the cuts after a marathon meeting between the oil-producing nations that lasted more than nine hours.
The other members of OPEC+, led by Saudi Arabia and Russia, earlier in the day agreed to cuts that would take 10 million barrels per day offline as the coronavirus pandemic saps demand for crude.
A statement released by OPEC following the meeting outlined details of the cuts but notes the measures were “agreed by all the OPEC and non-OPEC oil producing countries participating in the Declaration of Cooperation, with the exception of Mexico, and as a result, the agreement is conditional on the consent of Mexico.”
The extraordinary meeting kicked off around 10:30 a.m. ET and stretched into the evening.
Following the meeting, Mexico’s Secretary of Energy Rocío Nahle said in a tweet that the country would be willing to cut production by 100,000 barrels per day for the next two months. OPEC+ had reportedly asked for a cut of 400,000 barrels per day, according to Reuters.
OPEC said in a statement that the initial 10 million barrels per day cut would last in May and June, before tapering to 8 million barrels per day for the rest of the year. Beginning in January 2021, the cuts would decrease to 6 million barrels per day, which would continue through April 2022, according to the statement.
The agreement was not contingent on nations outside of OPEC+ curbing production, which some had suggested might be a stipulation for Saudi Arabia and Russia to scale back production. The group did, however, call on other major producers to cut production in a further bid to prop up prices.
Despite the record size of the potential cut, oil prices moved lower on Thursday as investors feared it would still not be enough to combat the unprecedented demand loss from the coronavirus.
“Although 10 million bpd will help the market on the short term to not fill up storage, it is a disappointing development for many, who still realize the size of the oil oversupply,” said Rystad Energy’s head of oil markets Bjornar Tonhaugen.
U.S. West Texas Intermediate fell 9.29%, or $2.33, to settle at $22.76 per barrel. Earlier in the session, the contract had been up more than 12% trade at a session high of $28.36. International benchmark Brent crude slipped 4.14% to settle at $31.48, after earlier hitting a high of $36.40.
“Covid-19 is an unseen beast that seems to be impacting everything in its path,” OPEC Secretary General Mohammad Barkindo said at the meeting. “For the oil market, it has completely up-ended market supply and demand fundamentals since we last met on 6 March,” he added.
Earlier WTI spiked more than 12% on reports that Saudi Arabia and Russia were discussing cuts that could have taken 20 million barrels per day of global production offline.
“The market has been underwhelmed by the proposed 10m/bd production cut, perhaps because of early expectations of a massive 20m/bd reduction,” said Helima Croft, RBC’s global head of commodities research. “However we contend that it is crucial to turn off the tap off the tap in the midst of colossal demand crash and bring the price war to a swift conclusion,” she added.
Ahead of the meeting, the Street had been watching for cuts in the 10 million to 15 million barrels per day range after Trump said he had spoken to Russian President Vladimir Putin and Saudi Crown Prince Mohammed bin Salman and expected them to announce a deal of that size.
“We’re optimistic that they’ll reach an agreement between the Saudis and Russians in an effort to stabilize the markets,” U.S. Energy Secretary Dan Brouillette said Thursday on CNBC’s “Squawk Box” before the OPEC+ meeting kicked off. “I think they can easily get to 10 million, perhaps even higher, and certainly higher if you include the other nations who produce oil, nations like Canada and Brazil and others. Easily, easily done,” he added.
Energy ministers from the Group of 20 major economies will convene for their own extraordinary meeting on Friday, in which Energy Secretary Dan Brouillette will participate.
The G-20 presidency said Tuesday that the meeting would be held “to foster global dialogue and cooperation to ensure stable energy markets and enable a stronger global economy.”
When it comes to U.S. energy companies, Trump has commented that market forces will prevail, and on Wednesday said that producers have “already cut way back.” Brouillette echoed this on Thursday, telling CNBC that the “demand downturn has led to production cuts in the United States of about 2 million barrels per day thought the reminder of 2020.”
At OPEC’s last meeting in early March, de facto leader Saudi Arabia proposed cuts of 1.5 million barrels per day to combat falling demand. But OPEC-ally Russia rejected the proposal, sparking a price war between the two powerhouse producers. Saudi Arabia slashed its oil prices to gain market share, and also ramped up production to record levels above 12 million barrels per day.
Since early March, the outlook for oil has changed drastically as the pandemic spread, with much of the world now staying home. Oil prices sank to their lowest level in nearly two decades. WTI and Brent both fell more than 50% in March for their worst month on record. The first quarter was also the worst in history, with WTI shedding 66%, while Brent fell 65%.
Amid the decline, which has pressured highly-leveraged U.S. oil companies, Trump sought to broker a deal between Saudi Arabia and Russia. On April 2 Trump told CNBC that he had spoken to Russian President Vladimir Putin and Saudi Crown Prince Mohammed bin Salman and that he expected them to announce a record production cut.
American drillers are still pumping near record levels as the world is coming to the edge of its ability to store oil. The U.S. oil industry is divided on whether it could or should contribute to production cuts in an effort to stabilize prices.
The American Petroleum Industry opposes cuts, saying such a move would harm the U.S. industry. In Texas, however, Ryan Sitton, one of the three members of the Texas Railroad Commission, has said that the state would consider participating in such a deal.