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An undone deal? Mexico is south of the border of OPEC’s historic cut

Global oil storage facilities are reaching maximum capacity and oil producers can't reach a final handshake over agreed production cuts. Oil is heading south

Mexico, won’t cut its production by more than 100,000 bpd and for Saudi Arabia, this is not acceptable Members would adjust downwards their overall crude oil production by 10.0 mb/d, starting on 1 May 2020 The coronavirus lockdown is removing between 15 million bpd and 35 million bpd of demand for 2Q2020, or 1/3 daily demand

Oil markets didn’t buy it. International benchmark Brent crude was around $32 a barrel as of Friday while the U.S. benchmark West Texas crude closed under $23. 

Today WTI is at $22.76  and Brent at $31.4 according to OilPrice.com as of publishing.

A massive and historic agreement last Thursday to have oil producers known as OPEC+ cut production by 10mbd per day, has not been signed, sealed and delivered as originally thought.

Mexico stands in the way, as it refuses to abide by it quote, despite US assurances that it would compensate for Mexico’s share.

If this is not resolved, the world is looking at Negative oil prices, as oil storage capacities can reach their fill one month from now.

Here are the details.

Read: What next for crude oil prices?

A deal breaker   

The U.S. stepped up pressure on Saudi Arabia to seal a historic deal to cut oil production as negotiations that President Donald Trump himself has brokered dragged on for a third day Saturday.

Mexico, won’t cut its production by more than 100,000 bpd and for Saudi Arabia, this is not acceptable, so for now the deal is off.  

A reduction of about 10% in worldwide crude output had looked all but certain. Even Russia thought the price war and market share battle that began in early March was over, which resulted in prices being 50% lower from January highs.

On Friday, a virtual gathering of energy ministers of the Group of 20 said it would take “all the necessary measures” to maintain a balance between oil producers and consumers, but it made no commitment toward specific steps on production cuts. 

Mexico’s Energy Minister Rocio Nahle insisted her country could only cut output by 100,000 barrels a day, 300,000 less than its fair share of 23% reductions by everyone in the OPEC+ group. 

Reuters today said that a compromise by U.S. President Donald Trump,  to offer an additional 250,000 bpd cut on Mexico’s behalf was met with a Saudi refusal.  

Other top oil producers have signaled the U.S.-Mexico arrangement is no hindrance to getting a deal, with the UAE and Algeria saying on Saturday a workable deal had been reached.

U.S. production is currently at 12.4 million mbd, from a high of 13 million just this week.

Read: Invest in crude oil storage tanks. There is no place to put the commodity

Read: S&P cuts WTI, Brent crude oil price assumptions amid continued near-term pressure

Can a deal save the day?

Forbes revealed details from the virtual OPEC+ conference last Thursday which agreed to make cuts using a Saudi and Russian baseline level of 11 mbd:

-Members will adjust downwards their overall crude oil production by 10.0 mb/d, starting on 1 May 2020, for an initial period of two months that concludes on 30 June 2020. 

-For the subsequent period of 6 months, from 1 July 2020 to 31 December 2020, the total adjustment agreed will be 8.0 mb/d.

This is to be followed by a 6.0 mb/d adjustment for a period of 16 months, from 1 January 2021 to 30 April 2022.

Is it enough?

If you consider that the lockdown is removing  between 15 million bpd and 35 million bpd of demand for 2Q2020, or roughly one third of typical daily consumption levels, then oil producers will need to find space for up to 1 billion barrels of oil in just one month’s time. 

That’s more than the entirety of onshore and floating storage available globally (~900 million barrels), according to Forbes. 

Oil producers will then need to pay for customers to offtake their crude – sending oil prices negative. 

Research firm Rystad Energy estimates the imbalance for April is 27.4 million barrels per day. The firm says global storage of crude is already close to being filled to the brim, estimating that on average 79% of the world’s oil storage capacity is already full. 

Around 7.4 billion barrels of crude and products are in storage, including 1.3 billion currently on board tankers at sea.