Oil: Trump promises 'help' for Mexico to seal cuts deal

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Oil producers are racing to finalise a deal to reduce output by about 10% in an effort to stabilise plunging prices due to coronavirus lockdowns.

Oil producers group Opec and allies on Thursday announced the record supply cut, but the plans were cast in doubt after Mexico baulked at the cuts.

Mexico later said they would move forward, thanks to a deal with the US to help shoulder the reductions.

US President Donald Trump said he had proposed to "help Mexico along".

He said the US would reduce its output and Mexico would "reimburse" the US at some later date. He added that he wasn't sure the deal would be accepted.

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"We're working on it. I think eventually it's going to work out," he said.

Oil markets were closed on Friday, as G20 energy ministers held talks to finalise the agreement.

But the prospect of cuts had failed to boost prices a day earlier, with many analysts saying they would do little to offset the massive drop in demand as the coronavirus pandemic has grounded planes, halted travel and put a brake on industry across the world.

'Reduce the surplus'

In prepared remarks at the G20 meeting, US Energy Secretary Dan Brouillette called the situation "dire" and made worse by the price war between Russia and Saudi Arabia, after Russia would not join a plan to cut supply last month.

Mr Brouillette said America would "take surplus off the market" by storing "as much oil as possible" and predicted a fall in US output, pointing to the struggles low prices have created for US companies. But he did not promise specific reductions.

"We call on all nations to use every means at their disposal to help reduce the surplus," he said.

Government-directed supply cuts would be highly unusual in the US.

However, on Friday, Mexican President Andres Manuel Lopez Obrador said Mr Trump had spoken to him on Thursday and suggested the US would help its neighbour with the cuts.

Mr Lopez Obrador said the US would make 250,000 barrels per day in additional cuts to its oil output, allowing Mexico to cut just 100,000.

Image source, Getty Images

Some analysts have questioned whether any agreed cuts would succeed in boosting the price of oil, given the prospect of a sharp and possibly prolonged global economic downturn, as the International Monetary Fund and World Trade Organisation have warned.

If it does remain subdued, lower prices on the wholesale oil market could lead to cheaper production costs of some materials, such as plastic. That would potentially be reflected in prices of everyday consumer goods. However, producer countries will see sharp reductions in revenue.

Jameel Ahmad, global head of currency strategy and market research at FXTM, said the production cut "is not the ultimate answer".

"Should the current corona restrictions persist in the world economic environment, demand for oil will drop to an extent that whatever Opec+ proposes will barely manage to put a stable floor on prices, let alone achieve a stronger medium and longer-term valuation," he said.

Crude had already fallen to just over $31 a barrel at the start of the month after Saudi Arabia failed to convince Russia to back production cuts that had previously been agreed with the other members of Opec. By the end of March crude had fallen to $22.58, its lowest price in 18 years.

On Thursday Opec secretary-general Mohammed Barkindo said: "There is a grizzly shadow hanging over all of us. We do not want this shadow to envelope us. It will have a crushing and long-term impact on the entire industry."

The Opec producers' organisation and its allies said they had reached a tentative agreement to cut production by about 10% compared to what was being produced before the crisis. Another 5 million barrels is expected to be cut by other oil exporting countries.

Opec said the cuts would be eased to eight million barrels a day between July and December. They would later be eased again to six million barrels from January 2021.

A final agreement was dependent on Mexico, which had questioned the size of cuts it was asked to make.

'Move to renewables'

However, environmental campaign group Greenpeace said that the world needed to move away from using oil altogether.

Greenpeace executive director John Sauven said: "In the context of climate change, production cuts don't matter one way or the other - the overwhelming impact of oil comes from its use."

"The economics of oil have always been beholden to geopolitics, rivalries between producing countries, as well as industry interests with no regard for people or planet."

"The urgent question facing us now is how to make sure that any future recovery builds a safe, resilient and healthier economy that can withstand future shocks and avoid climate breakdown. We need to build that recovery on clean, affordable renewable energy."