G20 backs biggest historic global output restriction deal

The US and the G20 backed a historic production cut agreement on Friday by the Opec+ alliance that is a pressure relief valve to oil markets hurt by a crunch in demand from the spread of the coronavirus pandemic.

On Thursday the Opec+ alliance had agreed in principle with the exception of Mexico to cut back 10 million barrels per day from the oil markets for two months starting May. US President Donald Trump later intervened on behalf of Mexico, to help the producer reach its quotas. The G20 agreement, while supporting action by the alliance did not commit to specific cuts.

"We commit to take all the necessary and immediate measures to ensure energy market stability," the G20 said in a communique.

"To underpin global economic recovery and to safeguard our energy markets, we commit to work together to develop collaborative policy responses, that will ensure market stability across all energy sources taking into account each country’s circumstances."

The G20, whose presidency is held by Saudi Arabia this year will establish a short-term focus group to monitor response measures. The focus group is open for all G20 parties on a voluntary basis, the statement added, hinting at a broadening of the Opec+ alliance.

Meanwhile, Russian energy minister Alexander Novak told Russia 24 TV that producers who are not part of the Opec+ alliance could cut as much as 5m bpd.

"We think that in addition to the 10m bpd that Opec+ will cut, there will be another 5m bpd cut by countries that are not included in Opec+, so in total, the cut in May and June will be 15m bpd," he said.

Russian companies were "ready" to co-operate with the output restrictions, he added. It was Moscow's reluctance in March to deepen production restrictions that led to the collapse of talks between the Opec+ alliance, prompting producers to boost supply for April.

Mr Trump who intervened on behalf of Mexico said he expects the southern neighbour to provide some form of reimbursement at a later date for the US' support in cutting production.

"We are trying to get Mexico, as the expression goes, over the barrel," Mr Trump said at a White House briefing on Friday.

Mexico, whose consent hinges on the production cut, said it reached an agreement with members of the Opec+ alliance to restrict global output, according to its president.

Mexican leader Andres Manuel Lopez Obrador spoke to Mr Trump to broker the deal overnight after the Latin American country walked away from discussions with Opec+ earlier.

Mexico will cut 100,000 bpd, while the US will shoulder 250,000 bpd. Mr Trump confirmed Mexico's expected production curb, but did not provide more details. Opec+ had initially wanted Mexico to cut 400,000 bpd, which prompted its energy secretary to walk out after hours of talks.

The deal, expected to begin in May, will see output curbs of 10m bpd in place for two months. The producers will subsequently pare back production by 8m bpd from 1 July until year-end.

"Even if poorly implemented, the agreement is substantial and will make a difference to the market," said Ann-Louise Hittle, vice president, Macro Oils, at Wood Mackenzie. "Partial compliance won’t stop this production agreement from having a big – and swift - impact on supply and demand fundamentals".

An adjustment of 6m bpd is expected to hold from the beginning of 2021 until 30 April 2022, according to Opec. The producers will calculate their quotas on the basis of their production baselines from October 2018, with the exception of Saudi Arabia and Russia who will both cut from 11m bpd.

The agreement is "conditional" on the consent of Mexico, Opec said in a statement earlier. Countries participating in the cut will meet virtually on 10 June to determine further actions to balance the markets. An extension of the pact to the year 2022 will be reviewed at a meeting of producers in December 2021, according to Opec.

The second half of 2020 is expected to see "an implied stock draw" said Ms Hittle, that will "support and lift prices significantly."

"The market will recognise this once the storage builds slow this quarter and start drawing down in the second half," she added.

On Saturday Norway, the largest oil producer in Western Europe who is not a member of the Opec+ alliance, said it is still considering cutting its oil production if the group implemented its plan, the country's minister of petroleum and energy Tina Bru told Reuters.

Norway represents around 2 per cent of global oil output and has cut back on its output in the past.