Oil Price Fundamental Daily Forecast – OPEC+ Agrees to Historic 10M Bpd Production Cut

OPEC, led by Saudi Arabia and its major allies, including Russia met on Friday after failing to reach a decision about production cuts the previous day. The second day of discussions took place earlier today at the G20 talks and proved to be more fruitful.

This time the top oil nations reached an early agreement, but then spent the rest of the day pushing toward finalizing a deal on across the board oil cuts in an effort to lift prices devastated by the coronavirus crisis.

At the end of the day, Russia and Saudi Arabia had agreed to take the lion’s share of the curbs, but it took an unusual willingness by the United States to help out to finally remove a key obstacle that was standing in the way of confirmation of the agreement.

Saudis and Russians Agree to Big Cuts

Saudi Arabia, Russia and other major producers, which make up the informal OPEC+ group, had forged a pact to curb crude production by the equivalent of 10% of global supplies in marathon talks on Thursday and said they wanted others to cut a further 5%.

Mexico Demands Stalls, but US Rescues the Deal

The deal hit a snag when Mexico insisted it would only cut its output by a quarter of the amount demanded by OPEC+. But then said the U.S. had offered to make extra cuts on his behalf.

President Trump said the United States was willing to help Mexico by picking up “some of the slack”, adding that Washington expected to be reimbursed.

Mexican President Andres Manuel Lopez Obrador said Trump agreed to help by cutting extra U.S. output after Mexico offered OPEC+ a cut of just 100,000 bpd, not the 400,000 bpd demanded.

Lopez Obrador said Trump had “very generously said to me that they were going to help us with the additional 250,000 bpd to what they are going to contribute.”

Mexico, which has long been in a standoff with Washington over Trump’s plan to build a wall between the two countries, cares less about low oil prices and more about volume because of its hedging program, which protects it against price falls.

The Proposed Deal

According to Reuters, OPEC+ documents showed all members reducing output by 23%, with Saudi Arabia and Russia each cutting 2.5 million bpd and Iraq cutting over 1 million bpd in May-June.

Additionally, OPEC+ would east cuts to 8 million bpd from July to December and relax them further to 6 million bpd between January 2021 and April 2022.

More Details to Follow

The narrative has been changing throughout the day on Friday, and hopefully we’ll get more clarity over the weekend before the market opens on Monday, however, the preliminary reaction to the cuts is bearish because the cuts may not be enough to stop Brent crude from reaching $20 per barrel. Based on that assessment, we could be looking for a near-term plunge of about $10 per barrel.