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April 10, 2020, 7:47 a.m. EDT

Mexican standoff imperils proposed 10 mln barrel OPEC+ oil cut

Even the proposed 10 million barrel per day oil output cut may not be enough to offset plummeting demand as storage capacity nears maximum

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By Associated Press

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Saudi state television also quoted Energy Minister Prince Abdulaziz bin Salman as saying the OPEC+ deal “depends” on Mexico. OPEC also made that clear.

“The agreement is conditional on the consent of Mexico,” OPEC said.

The baseline for the agreement sees Saudi Arabia and Russia, the two dominant producers, cutting back from 11 million barrels a day, OPEC said.

The oil market was already oversupplied when Russia and OPEC failed to agree on output cuts in early March. Analysts say Russia refused to back even a moderate cut because it would have only served to help U.S. energy companies that were pumping at full capacity. Stalling would hurt American shale-oil producers and protect market share.

Russia’s move enraged Saudi Arabia, which not only said it would not cut production on its own but said it would increase output instead and reduce its selling prices in what became effectively a global pricing war.

In the time since, prices have collapsed as the coronavirus pandemic has halted global travel. International benchmark Brent crude traded Friday over $31 a barrel while the U.S. benchmark West Texas crude traded under $23.

Russia relies on oil as the main source of income and the price collapse caused the ruble to crash, boosting the cost of imports and inflation.

In his opening remarks at the start of Thursday’s call, Russian Energy Minister Alexander Novak emphasized the need for “all oil-producing countries to pool efforts to change the situation of a significant global oversupply.” He said global demand had fallen by 10-15 millions barrels a day.

“We believe it necessary to increase the number of countries that could join efforts to help stabilize the situation,” he said, welcoming Norway, Canada, Indonesia and others that hadn’t been part of the so-called OPEC+ talks.

Analysts, however, warn the proposed 10 million barrel per day cut for May and June will not be enough to offset plummeting demand for oil globally, and the plan runs the risk of coming too late as storage capacity for oil nears its maximum. Even if North American producers took 5 million barrels a day off the market, there could still be an excess supply of 5-10 million barrels per day.

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.

Chris Midgley, global head of analytics for S&P Global Platts, said the proposed cuts are unlikely to have any significant impact on April supply, and thus run the risk of getting close to exhausting all available storage in May.

However, a cut of 10-15 million barrels per day is enough to prop up oil prices and helps to reduce strain on crude storage facilities, analysts said.

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