The deal reached on Sunday between Russia, Saudi Arabia and other oil producing nations is not enough to solve the oil price problem. Cutting 9.7 million barrels a day is not enough to save the American shale oil companies. The pandemic has reduced oil consumption so much that the deal won’t be enough to stabilize the market. But, an unexpected winner in the deal was México.
Donald Trump intervened in the negotiations to try to offset the American oil industry demise. What many have forgotten is that the United States imported oil prior to the shale oil boom. It was America’s shale oil and its entrance into the oil exporting business that destabilized the markets. Saudi Arabia, trying to starve the American shale oil business, started to flood the oil markets. Russia followed because of Saudi Arabia.
In between the oil battles between Saudi Arabia and Russia fighting to take market share from the Americans, the pandemic deteriorated the worldwide economy so much that oil production has dropped by about 30 million barrels daily. The deal reached on Sunday is not enough to deal with the drop caused by the worldwide pandemic crisis.
Trump and those advocating for U.S. shale oil were hoping to save the 10 million American jobs tied to the U.S. shale oil industry. American shale oil producers need a $40 a barrel price point to be profitable. Oil closed on Monday at about the $22 a barrel level, even with Sunday’s agreement.
American shale oil jobs remain in jeopardy.
But one unexpected winner in the oil deal is México.
The Mexican government agreed to cut oil production by 100,000 barrels a day. That is just a quarter of what was requested of it in the OPEC+ deal. Unable to convince the government of Andrés Manuel López Obrador (AMLO) to meet the oil production cuts, the governments of Brazil, Canada and the U.S. instead will cut their combined oil production by 10 million a day to help offset the Mexican levels.
Since taking office, AMLO has been banking on Mexican oil production to help pay for his domestic agenda. How it will affect México in the longer run is still up for debate. For now, México and AMLO are clear winners.
The bottom line remains that the oil deal does little to help the American shale oil workers.
