Mexico City has become the last holdout among the nearly two dozen nations negotiating an agreement to cut crude oil production by some 10 million barrels per day (bpd) over the next two months, with the country’s resistance putting the deal in jeopardy and prompting President Trump to intervene.

Mexican President Andres Manuel Lopez Obrador’s refusal to cut his country’s oil output by more than 100,000 bpd can be explained by the way the country prices its oil, some energy experts believe.

“The thing with Mexico is, they’re one of the only key countries which hedges a lot of their production with a bunch of put options,” says Jeremy McCrea, director of equity research at Raymond James Canada.

According to McCrea, President Trump’s commitment to take a 250,000 bpd production cut on Mexico’s behalf, which President Obrador described as “generous,” shouldn’t be taken as face value either, as Washington may quietly stash this cut in output in its reserves. The same thing can be said about many producers’ “cuts,” he says.

Crude oil storage tanks are seen from above at the Cushing oil hub, in Cushing, Oklahoma, March 24, 2016

McCrea believes that the proposed cuts are based more than anything on creating “headline numbers” for the markets to try to stop prices from tanking any further. “But in reality, I think the market can see through all these different things,” he says.

Numbers Don’t Add Up

Amena Bakr, correspondent, analyst and deputy chief of the Dubai bureau at Energy Intelligence, a leading global energy sector analytics service, says that even with Trump’s offer to cut 250,000 bpd in output on Mexico’s behalf, the numbers still don’t add up, with Mexico still short 50,000 barrels from the cuts requested by OPEC+.

Veracruz, Mexico: La Muralla IV, semi-submersible drilling rig for ultra deep water operations, owned by Mexican Grupo R and operated by Pemex, the state-owned Mexican oil company

Bakr believes Trump made the offer to assist Mexico with cuts because his administration is under a great deal of pressure from US shale producers, who have been hit particularly hard by the recent drop in oil prices owing to their higher production costs.

On April 1, Colorado-based Whiting Petroleum Corp became the first major shale producer to file for bankruptcy amid the glut, while others, including Denbury Resources Inc, have reportedly been communicating with debt advisors. On Friday, Reuters reported that major US banks were setting up independent structures to become operators of oil and gas fields across the United States amid fears that more producers could go belly up.

“I want to remind you that shale producers in the US live in states that are Republican states. These Republican states are in support of President Trump. And when the election comes, he needs these states to support him,” the analyst stresses.

“I think it is going to take a long time for the market to stabilize. And this the reason that we saw the deal structured in this way,” he said, pointing to the multi-tiered plan including 10 million bpd in cuts over the next two months, followed by 8 million bpd in cuts starting in July and through to 2022. “So they have a long-term plan of market management ahead of this. One, this is reassuring to the market, and two, this is needed for the market that is so damaged to an unprecedented level. You need these kinds of extraordinary measures in place to attempt to [create] a balance,” Bakr concludes.

Sourse: sputniknews.com

New OPEC+ Standoff: Analyst Explains Why Mexico Resisting Cuts, Would Make Money Even at $5 Oil

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