OPEC+And G20 Oil Output Cut Talks Metaphorically Closer To A Bad Burrito Not Mexican Standoff

Late into the OPEC+ meeting on Thursday (April 9), Mexico’s oil minister Rocío Nahle stopped what is being described as an oil production cut agreement of historic proportions dead in its tracks.

The output reduction, to the tune of 10 million barrels per day (bpd), has been conjured up to cope with demand declines in the wake of the coronavirus or Covid-19 pandemic. Near instantaneously, the country’s machinations were described as a ‘Mexican Standoff’.

Now if we are going strictly by the Cambridge Dictionary’s definition, a Mexican Standoff is a situation in which people on opposite sides threaten each other but neither tries to come to an agreement. By that definition, I doubt Mexico’s holding up of OPEC+ is a perfect example of a Mexican Standoff.

Look closer, and the OPEC+ hotchpotch is way closer to the making of a bad burrito being served up at restaurant full of punters with very little appetite. Done well a burrito can be a delight, done poorly and its a bit of drag on the palate. But the recipe in either eventuality remains flexible to a degree within a flour tortilla wrapped into a sealed cylindrical shape around various ingredients.

In Mexican standoff, those squaring off are defined but that predictability – of OPEC+ members – was diluted at Thursday’s meeting. In a burrito even the meat base, let alone side ingredients can be altered, more like new, er OPEC++, since the meeting welcomed Argentina, Colombia, Ecuador, Egypt, Indonesia, Norway, Trinidad and Tobago and the International Energy Forum (IEF) “as observers.”

In a Mexican standoff those squaring off show up but on Thursday some didn’t show up despite being invited. Some decided to join the talking shop 24 hours later in the guise of G20 Energy Ministers, many of whom being major importers who sort of like the idea of low oil prices when they are grappling with a global pandemic.

Now that gives the deliberations the feeling of making do with what you have, and anything and everything when conjuring up a bad burrito, and making things even queasier via random hit-and-trial jiggery-pokery.

Later in the proceedings, when Mexico blocked the OPEC++ agreement, a communiqué was still issued outlining cuts of 10 million bpd subject to the country’s approval and not at all stand-offish! Rather, more like serving up a randomly cobbled recipe thinking the buyers would buy it. If the buyer was supposed to be the crude market, he/she certainly didn’t buy it on the last voluminous day of oil trading before the Easter break.

So burrito metaphor it is then! But is it a bad burrito? And do prospective customers have no appetite? In my book, most certainly yes. Consider this, Saudi Arabia and Russia will cut from a level of ~11 million bpd – a figure neither can convince the market they were producing at, and by no means anywhere near Saudi output at the time of the OPEC+ December meeting of 9.744 million bpd.

Similarly, there is an abject lack of clarity over what does or doesn’t constitute headline Russian production or if it does or doesn’t include condensates. Can the Mexicans then be blamed then for suddenly plucking a figure from the air and saying they’ll only cut by 100,000 bpd and not the suggested 400,000 bpd! And of course, subsequently suggest that U.S. President Donald Trump has offered to pitch in with a 250,000 bpd cut to help them out.

That brings us to Trump, whose initial quip on Twitter brought OPEC+ or OPEC++ or OPEC+G20 together via a claim that a Saudi-Russian move to cut was on the horizon, as it now appears to be. But Trump says “free market” will “automatically” bring a correction of around 1 million bpd when it comes to U.S. production that averaged 12.75 million bpd at the turn of 2019.

That’s a bit like the customers – say Mexico and before that Russia – asking for pico de gallo in their burrito and being told peanut butter is coming, simply because the chef can’t make pico de gallo as Trump cannot force an American industry driven by the spirit of private enterprise to cut in a cartel-like fashion.

As the crude burrito analogy goes from bad to worse, enter the metaphorical customers with a distinct lack of appetite – the oil consuming nations of the world, many of whom are weighed down by the coronavirus pandemic that’s wrecking their near-term prospects and has them in lockdown.

Even the most conservative estimates put global oil demand decline for April in the region of 18.5 million bpd, and the most alarmist ones put it as high as 30-35 million bpd. Even if the eventual figure comes out to be somewhere in the modest middle, 10-15 million bpd in production cuts will not quite cover it.

In the end, Mexico as well as the false analogy of a Mexican Standoff would turn out to be little more than a distraction. What would be left behind is likely to be a metaphorical bad burrito made up of a hotchpotch of ingredients [i.e. random cut levels, promises that won’t be kept and short-termism] for customers who either want something different [i.e. the taco of lower oil prices for G20 consuming nations] or don’t want it at all [i.e. economies lowering near-term imports].

And since those already made burritos [i.e. oil barrels out of the ground] can’t be stored forever [oil storage space may run out in the next six weeks] and customers become scarce, some in the business will fold rather than contend with a face-off unmoved. Ultimately what the oil market is witnessing is a crisis of demand. However much the supply-side is tinkered with unless demand scenarios improve, the industry’s fortune remains dire.