The Daily Dose

-Thesis clashes with the antithesis and yields something new.

-Mexico called to play nice, though the US and others given a free ride.

The breakdown of a plan to trim at least 10 million barrels per day from the global market early Friday shows not only the difficulty in coordinating across multiple fronts but also the degree to which the damage has already been done. OPEC in a final communique stated that all parties were in agreement on a path forward apart from Mexico. The deal, therefore, “is conditional on the consent of Mexico.” While the government has been relatively quiet about the details, the chronic production decline may be its de facto contribution from the Mexican standpoint. Next up is a meeting of G20 ministers, though the roadblocks to a grand bargain are significant.

Trading is idled in observation of Good Friday, though market watchers remain tuned into the oil sector. Brent crude oil had a volatile session on Thursday, trading up at least 7% intraday on word of dramatic cuts from the world’s major oil producers. The global benchmark managed only a 0.16% gain and could’ve fallen further if the trading desks were open.

After a marathon videoconference among OPEC and other producers, the group said there was an agreement to trim 10 million bpd from the market starting May 1. That would stand for two months and the limits would gradually lessen through April 2022. Mexican Energy Minister Rocío Nahle said in a statement on Twitter that March production was around 1.78 million bpd and it could cut lower, to 1.68 million bpd. OPEC, apparently, wanted more. But perhaps from the Pemex perspective, there’s nothing more to give.

Mexican President Andres Manuel Lopez Obrador has tried to breathe new life into the energy sector by stimulating production. Production topped out at some 3.4 million bpd in 2004 and has declined every year since then. As with US producers, the Mexican energy sector is under enormous pressure under current market conditions. AMLO, as the Mexican president is known, may be in an uncomfortable position of abandoning nationalist principles and let Pemex sink further for the betterment of the global market. Or he won’t. In March, the government line seemed to be that natural declines were enough. A 100,000 bpd cut is a modest proposal from a struggling producer.

Amid suggestions that non-OPEC members such as the United States and Norway join the crowded room, the Kremlin – one of the leading voices in the OPEC+ group – said artificial constraints were not official contributions. Saudi Prince Abdulaziz bin Salman told the Reuters news agency that Brazil, Canada and the United States were free to “do it in their own way, using their own approaches, and it is not our job to dictate to others what they could do based on their national circumstances.” Western Canadian Select is already in a free-fall and most producers are going through involuntary cuts during the demand destruction caused by the coronavirus pandemic. Amena Bakr, the grand duchess of OPEC news and a chief analyst at Energy Intelligence, quotes AMLO as saying the United States would cover 300,000 bpd in cuts so the collective contribution would come in at 400,000 bpd. The US position as of this writing is unclear. Continental Resources, a North Dakota shale producer, stated Tuesday it was cutting production by 30% due to market constraints. It could be the sacrificial lamb.

Coordinating across multiple lines is difficult enough without trying to navigate through competing state-centric and free-market ideologies. The recipes for success increase as more chefs enter the kitchen. The recipe for now means major producers, including the United States, must sacrifice a significant portion of their economic lifelines to prop up the global energy chain. In examining systems theory, dramatic changes occur only after an all-encompassing clash such as war. The global pandemic may be that clash.

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