A Global Oil Cartel?

Worldwide trade has fallen by 32%, and the best-case scenario - as we hit nearly 1.5 million confirmed cases of coronavirus - is containment by July. At the same time, JPMorgan is predicting a 40% dip in GDP, and the containment of oil producers is proving just as complicated with added political variables. 

Fossil Fuels: The Powerlessness of OPEC

As COVID-19 strips global oil demand down to disastrous levels with predictions for worse to come, OPEC is no longer relevant, nor is OPEC+. In this world, the cartel is either global or it is powerless. In fact, the make-or-break deal to end the price war and cut production has come down to the U.S. and Mexico - about as far afield from OPEC as is possible to get. Either there is no more OPEC, or OPEC is now, officially or unofficially, a global cartel. 

Realistically speaking, the world would need around 20 million bpd in cuts to even think of changing market sentiment and keeping prices from cascading down further. 

Instead, we got a 10-million-bpd cut, starting on May 1, for two months. After that, the production cuts will step down to smaller amounts through April 2022. OPEC set the baseline for the cuts at October 2018 production levels, except for Saudi Arabia and Russia, whose baseline will be 11 million bpd. 

It’s a figure that will only partially offset the price war + pandemic oil disaster. 

And even this figure is in question because it hinges not on a belligerently over-producing Iraq or other non-compliant OPEC member, but on Mexico and a new populist president (AMLO) who has so far flitted through the COVID-19 crisis without a care in the world. 

OPEC+ will now look to Friday’s G-20 meeting to see it can pick up another 5 million bpd of cuts from some of the non-OPEC+ G-20 members and get Mexico back onboard. OPEC stressed that the deal is contingent on Mexico agreeing to its share.

What the market needs to be aware of is this: AMLO is driven by populist ideology, and he is stubborn to the core. More to the point, his populist ideology has made increased production for state-run Pemex the core of his presidency. Pemex was aiming to nearly double drilling in 2020, with an eye to speeding up the development of 15 new discoveries. 

But not even AMLO can avoid the price war + COVID crash. 

Even prior to the virtual OPEC meeting, he was laying the foundation for a potential reduction in output for Pemex in a major about-face. But when a presidency hinges on an extremely vocal plan to return Pemex to its former glory, this requires a fair amount of clever PR.

Our high-level sources on the ground in Mexico, including government officials and industry leaders, say the world is now AMLO’s stage. He will most likely attempt to play the victim while spouting off about the tyranny of global capitalism. He will drag his heels on a coherent response.

What that means is that whatever deal is to come is likely to eventually see AMLO on board, but not without a serious amount of grandstanding beforehand to shore up his status. He will have to be presented to his public as the savior of oil.  

There is talk of the US coming to the deal’s rescue by offering to offset part of what Mexico is being asked to cut. To wit: Reports are saying that while Mexico has refused to cut the requested 400,000 bpd, it would cut 100,000, with Washington offering to absorb the remainder, in addition to its own cuts. But this may be a lot of smoke and mirrors. Washington does not, after all, control the production of the country’s oil companies. This deal is a euphemism for “let the market sort it out”.