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G20 energy ministers struggle to finalise oil output cuts

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Oil prices have slid to near two-decade lows, hit by the virus and a Saudi-Russia battle for market share. AFP

G20 energy ministers struggle to finalise oil output cuts

Top oil producers struggled to finalise production cuts during a virtual summit held by Group of 20 (G20) energy ministers on Friday, despite US President Donald Trump’s mediation efforts to end a standoff with Mexico.

The final G20 communique appeared to gloss over simmering divisions over energy policy, making no mention of output cuts and pledging simply to ensure oil “market stability” amid the coronavirus pandemic.

Mexico was the lone holdout in a record Organisation of the Petroleum Exporting Countries- (Opec-) led agreement reached a day earlier that would see output slashed by 10 million barrels per day (mbpd) next month and in June followed by a gradual reduction in cuts until April 2022.

The standoff had cast doubt on efforts to bolster oil prices, pushed to near two-decade lows by the demand-sapping pandemic and a Saudi-Russia price war that rattled global markets.

The subsequent G20 meeting – hosted by Riyadh – was expected to seal the deal more widely with non-Opec countries in the group including Mexico, the US and Canada.

But there was no sign of an agreement in the group’s final statement.

“We commit to ensure that the energy sector continues to make a full, effective contribution to overcoming Covid-19 and powering the subsequent global recovery,” said the statement released early on Saturday.

“We commit to take all the necessary and immediate measures to ensure energy market stability.”

There was no sign that countries such as Canada – the world’s fourth largest producer – had committed to specific cuts, with Natural Resources Minister Seamus O’Regan saying the G20 summit “didn’t discuss numbers”.

Under the Opec deal, Mexico was expected to cut production by 400,000 barrels per day (bpd) but it resisted the suggestion.

Mexican President Andres Manuel Lopez Obrador said he had reached an agreement with Trump to cut production by only 100,000bpd.

He added that Trump had agreed to cut US production by 250,000bpd “as compensation” for Mexico.

Trump later confirmed the deal, saying the US will “make up the difference” by cutting “some US production”.

The G20 statement was silent on the Mexico-US deal.

‘Ghostly spectre’

The tentative production cut deal, which hinges on Mexico’s consent for it to take effect, marked a possible end of the price war between Russia and Saudi Arabia.

Both oil producers took on the lion’s share of the cuts as they agreed to slash output to around 8.5mbpd, Bloomberg News reported.

“Our global energy systems, from producers to consumers, is in uncharted territory and it is our responsibility to find the path forward,” Saudi Minister of Energy Prince Abdulaziz bin Salman told the G20 gathering.

“Saudi Arabia urges all G20 members, including Mexico, as well as invited countries to take appropriate and extraordinary measures to stabilise market conditions.”

Russian Minister of Energy Alexander Novak also urged the G20 ministers to act in a spirit of “partnership and solidarity”, a local television station reported.

Opec secretary-general Mohammad Barkindo warned that the global crude storage capacity would be exhausted before the end of next month because of a supply glut and a “jaw-dropping” drop in demand.

“There is a ghostly spectre encircling the oil industry,” Barkindo told the ministers.

“We need to act now, so we can come out of [the] other side of this pandemic with the strength of our industry intact.”

The impact of the tentative deal on prices was not immediately clear as the global oil markets were shut on Friday for the Easter weekend.

However, AxiCorp analyst Stephen Innes said the supply cuts were “less than the market hoped for” given the hit to demand from coronavirus lockdowns throughout the world.

“The deal currently tabled will only partially offset oil price distress. The storm clouds for oil prices will only completely dissipate when lockdowns are lifted,” he said.

‘Deep abyss’

Rystad Energy also said the cuts were not enough to restore market equilibrium.

“The proposed 10mbpd cut for May and June will keep the world from physically testing the limits of storage capacity and save prices from falling into a deep abyss.

“But it will still not restore the desired market balance,” the energy research firm said.

Oil prices have slumped since the beginning of the year due to the Covid-19 pandemic.

Compounding the problem, Riyadh and Moscow had both ramped up output in a bid to hold on to market share and undercut US shale producers.

Trump has expressed optimism about the prospects for an agreement after a conference call with Russian President Vladimir Putin and Saudi Crown Prince Mohammed bin Salman on Thursday.

Putin discussed energy developments separately with Trump and Prince Mohammed again on Friday, the Kremlin said.

While the US is not in the Opec or the wider Opec+ groups, it is supportive of a reduction in supply in order to stabilise prices and breathe new life into its shale industry.

Shale has transformed the US into the world’s top producer, but the industry cannot sustain its high cost base as prices collapse.

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