Page 5 - LatAmOil Week 15 2020

LatAmOil COMMENTARY LatAmOil
 Almost a deal
Moscow and Riyadh worked out the basic out- lines of a new production agreement with other members of the OPEC+ group on April 9.
They then unveiled the new plan, explaining that they had agreed to reduce the amount of crude sent to market by 10mn bpd in May and June, dropping to 8mn bpd in the second half of 2020 and again to 6mn bpd between January 2021 and April 2022. They said they had pledged to consider extending the accord in December 2021 and further stated that they would hold a new round of video consultations on June 10 to determine whether additional action was needed.
They also mentioned that these cuts were not exactly set in stone. Rather, they noted that Mex- ico had not agreed to the proposed 400,000 bpd reduction in output – and that no deal would be forthcoming without Mexico’s consent.
Winning its point
Mexico is not a member of OPEC, but it is part of the extended OPEC+ group. And unlike other members of this group, it has not been pub- licly supportive of the idea of production cuts. Instead, its government has doggedly clung to the strategy it adopted before oil markets began plummeting in early March – namely, that of working to push yields up.
The country has taken this stance partly because of the preferences of its populist pres- ident, Andres Manuel Lopez Obrador, who woulddearlyliketoseedomesticoperatorsturn the oil sector back into an engine of economic growth without too much help from foreign investors. But it may also have done so because it has suffered less from the market crash than other producers.
Thus far, Mexico has been able to stay ahead of the curve. That is, it has had more insulation from price volatility because of its decision to hedge a large part of its 2020 output at the rate of $49 per barrel – a fortunate figure indeed, given that some benchmark grades of crude have briefly dipped below $20 in recent weeks.
In turn, this extra cushion may have fuelled Mexico’s reluctance to endorse sweeping output cuts. When informed of the OPEC+ group’s expectation of a 400,000 bpd reduction, Mexi- can Energy Minister Rocio Nahle countered by saying that her country was not willing to bring yields down by more than 100,000 bpd.
In the end, Nahle won out. OPEC and its allies agreed to hold Mexico to a cut of just 100,000 bpd. They said they hoped other pro- ducers would be willing to commit to additional reductions to bring the total amount taken off the market to 10mn bpd, but they accepted the smaller number of 9.7mn in the hope of striking a deal that might lend some support to prices.
Claims of victory
Mexican government officials were quick to describe this outcome as a victory for the president.
For example, Foreign Minister Marcelo
Abrard praised Nahle on Twitter for “defending the interests of Mexico.” He added: “The strat- egy designed by Lopez Obrador worked. Good news!!!”
And initially, oil markets did react positively to reports of the new OPEC+ deal. Brent crude gained nearly 5% over the weekend, while WTI went up by about 6.6% – not a bad showing, considering that both benchmark grades have plunged by more than 50% since the beginning of the year.
Since then, though, prices have started slid- ing down again, largely because of traders’ and analysts’ perceptions that the reductions in out- put simply don’t go far enough to make up for coronavirus-related demand destruction. This is worrisome news for Mexico, given the extent to which the country depends on oil revenues.
Trouble ahead?
And there may be more pain ahead. Brent crude has gone back below $30 per barrel this week, despite the OPEC+ deal, largely because of expectations that demand will plunge to a 25-year low this month.
Certainly, the International Energy Agency (IEA) painted a bleak picture of the market’s outlook in its monthly report published on April 15. The agreement between OPEC and its allies to take 9.7mn bpd off the market in May and June represents a “solid start,” the IEA said. It also warned, though, that there was “no feasible agreement that could cut supply by enough to offsetsuchnear-termdemandlosses.”
The agency also noted that OPEC+ efforts and drastic output cuts by other producing nations were not enough to compensate for the heavy stock build that is threatening to over- whelm the industry. Available storage capacity could be filled within weeks, the IEA said, and bottlenecks are already emerging in other parts of the logistics chain. Chartering costs for very large crude carriers (VLCCs), which are increas- ingly being used for floating storage, have dou- bled since February, the agency estimated.
“Never before has the oil industry come this close to testing its logistics capacity to the limit,” it said.
Additionally, the IEA predicted that capital expenditures in the global upstream industry were likely to slump 32% this year to $335bn, marking their lowest level in 13 years. Under these circumstances, it said, economies heav- ily dependent on oil revenues could jeopardise already fragile social stability. Mexico may not be able to escape such consequences, even if it did win the day during the OPEC+ talks.™
“ in oil prices is
The recent slide
worrisome news for Mexico, given the extent to which the country depends on oil revenues
Mexico’s president (L) and energy minister (R) / (Photo: Twitter/@rocionahle)
Week 15 16•April•2020 w w w . N E W S B A S E . c o m P5