By Barani Krishnan

Investing.com – It used to be, “if we build it, will they come?”  The Saudis have now turned it to, “if we build it, will the others cut?” It looks like Mexico will answer that.

After crude prices went to the brink of disaster from the combination of Saudi production hikes and demand destruction from COVID-19, a whirlwind of global oil diplomacy by a character who had fought OPEC all his life – U.S. President Donald Trump – appeared to have saved the day for world producers. But that was until Friday.

As the hours continued toward Easter Sunday, Mexico was still holding out on agreeing to nominal production cuts under the Trump-brokered truce and the entire deal could still collapse, Bloomberg reported.

How did we get this far for one nation – albeit not even the biggest crude producer – to hold the world alliance of oil countries at its mercy is a story worth a lot more writing.

But for the purpose of the weekly review I’m writing, let’s assume the so-called GLOPEC deal involving Mexico can still be salvaged and a breakthrough will be announced in the coming hours or days (oil will be going to hell in a handbasket otherwise, we can assume).

For this GLOPEC deal to work – for 50 years, we only heard of OPEC, then came OPEC+ and now this – analysts, journalists and traders  covering the sector need to be convinced first that it can remove at least 10 million barrels per day of supply from the world market as it intends.

Why? Because when all is said and done, what the number crunchers at the International Energy Agency and Goldman Sachs see; how Bloomberg and Reuters report that data; and what the biggest hedge funds do with all that information will largely dictate where crude prices go. What Trump hopes for, what Saudi crown prince MBS wants and what Russian President Vladimir Putin believes will matter less at that point.

Let’s analyze the GLOPEC deal as it stands 

In the first pact announced Thursday, OPEC+ aims to cut 10 million bpd through July, then 8 million bpd through the end of the year, and 6 million bpd for 16 months beginning in 2021. This is despite a demand loss of up to 30 million bpd expected over the next quarter from the COVID-19. 

From what we hear, the Saudis will cut 3.3 million bpd and Russia 2 million bpd, with the balance ostensibly coming from the other 21 countries in the alliance. It’s also logical to conclude at this point that none of the powers in the agreement – except, of course, the House of Saud and the Kremlin –  know how the balance cuts will be divvied up as quotas among them. 

In the second pact announced by Trump on Friday, Mexico and the United States are to lead other global oil producers within the Group of 20 countries – an interesting misnomer in itself since none of the other countries are actually mentioned – to cut some 400,000 bpd. 

The entire deal GLOPEC was reportedly almost scuttled on Friday when Mexico wailed at first that it won’t cut a single barrel, then agreed to drop just 100,000 bpd. MBS and Putin had apparently tried to extract a 400,000 bpd promise from Mexico’s President Andrés Manuel López Obrador. Why these two over-producers of oil would expect such magnanimity from a country whose output has been declining the past 15 years escapes me. 

This is when, Trump – again – rode in like a white knight, offering to top up Mexico’s portion of the cuts with a 250,000-300,000 bpd reduction from America’s production. The U.S. president’s role in GLOPEC cannot be understated as it was his tweets from last week that got the Saudis and Russians to stop their destructive price-and-production warfare and come together for a deal. 

But what’s interesting is, Trump made no mention where the 250,000-300,000 bpd that he will shoulder for his Mexican counterpart will specifically come from. But he conveniently let it slip to the market that U.S. oil drillers were on track anyway to reduce between 2 million and 3 million bpd in output through upcoming cuts in capital expenditure and sheer drop in rig counts. We should, therefore, assume that the larger Mexican portion of the cuts would be rolled – like a fajita – into the hypothetical U.S. cuts.

If my breakdown of the two deals do not already give you an idea of what a sham this is, hear it from the experts:

“Even if in some perfect world we see full OPEC++ compliance and 10 million bpd in cuts, this still leaves an incredible minimum 10 million bpd supply overhang for 2Q20,” said Louise Dickson, oil market analyst at the Oslo, Norway-based Rystad Energy.

“The proposed OPEC++ cuts alone cannot reverse the deep contango curve of Brent prices in a meaningful or lasting way as storage is needed to remain economical to handle the current and still coming oversupply,” said Dickson, adding that benchmark Brent at the low $30s cannot be supported as a bigger contango is required to pay for storage that will soon be needed.

Contango refers to a situation in commodities where the front-month contract in a particular market trades at a discount to further months for delivery. 

In Brent’s case, spot crude for June traded on Friday at a discount of nearly $9 a barrel to the contract scheduled for delivery in a year’s time. Such a market dynamic allows traders to buy crude immediately, put it in storage somewhere, and try to gain by selling it forward. While that may be lucrative for the individual, the oil sitting in storage shows up as part of global inventories, further depressing the spot price.

Dickson also concurred with my point on the difficulty in believing what producers say about pledged cuts against what’s delivered – a situation made dire by global storage space for oil already running critically low.

“We find it very unlikely that the full 10 million bpd cut will be implemented as May 1 is just three weeks away and cuts of that size take time to realize. The oil machine is not as flexible as just simply turning off the tap or pressing a button,” he said.

For good measure, Rystad Energy Chief Analyst Per Magnus Nysveen adds:

“There is about 700 million barrels of crude storage left, at land and sea, so only 30 days left if no prompt cuts take place. With 10 million bpd cuts, we will hit the wall 2 weeks later. So to get through May we need at least 5 million bpd mote cuts quickly, and all producers should now contribute their fair share.”

New York-based consultancy Energy Intelligence makes the same point. It said the market was immediately focused on the remainder of April – the messiest month of oil balances, thus far – and what to do with upcoming barrels in May.

“March ran a staggering 14 million barrels per day surplus and April’s will be similar as shut-ins help offset some demand loss,” Energy Intelligence said.  “A production cut would only start to clean up the balances on paper starting in May, while the physical oil market would remain swamped until June.” 

That’s it so far on oil.

As for gold, the trajectory for $1,800 per ounce seems in place, though the path may be fraught with volatility by investors looking to cash out quickly if stocks come under fresh pressure next week from a tumble in crude prices. 

Fundamentally, markets are flooded with cash from central banks around the world which is inflating gold prices at this highly uncertain time. The Federal Reserve announced a $2.3 trillion effort to bolster local governments and small and mid-sized businesses on Thursday, the latest in an expanding suite of programs meant to keep the U.S. economy intact as the country battles the coronavirus pandemic.

The test will come for gold if we see the the stock market turn down again, given that the yellow metal has been quite closely correlated with equities lately, while the remains a safe haven of choice.

Energy Review

Oil prices swung wildly – rising 12% in early trade, then settling 9% lower, before paring losses in post-settlement trade – as the OPEC+ alliance reportedly agreed to a 10 million-barrel-per-day output cut by June that would still cover only a third of the demand estimated lost to the coronavirus pandemic. 

down $2.33, or 9%, at $22.76, after a session high at $28.33. For the week, WTI lost nearly 20%.

, the London-traded global benchmark for crude, finished the official trading session at $31.48, down $1.36, or 4.1%. Brent’s peak for the day was $36.38. For the week, Brent fell almost 8%.

With the coronavirus pandemic reducing the big fanfare of the typical OPEC meeting in Vienna to a mere video hook-up, oil ministers from the Saudi-led cartel had to be content with a virtual meeting with their Russian and other allies. 

That also complicated the job of reporters, who instead of hogging the stairwell of the OPEC building in the Austrian capital to gang-press delegates coming out of the meeting room, had to communicate electronically with them and other sources to know what was going on.

Energy Calendar Ahead

Monday, April 13

Private Genscape data on Cushing oil inventory estimates

Tuesday, April 14

weekly report on oil stockpiles.

Wednesday, April 15

EIA weekly report on

Thursday, April 16

EIA

Friday, April 17

weekly rig count.

Precious Metals Review

Fed Chair Jay Powell aimed a $2.3 trillion bazooka at the jobs-killing virus called the Covid-19, and shot gold to an 8-year high.

for June delivery on New York’s COMEX settled up a whopping $70.80 cents, or 4.2%, at $1,736.20 per ounce. It earlier scaled $1,754.20 – the highest for a front-month gold futures on COMEX since February 2012. June gold rose 5.8% on the week. 

, which tracks live trades in bullion, trailed the highs in futures, probably because of the scarcity in physical gold. Spot gold last traded at 1,689.90, up 0.4%, with a session high at $1,690.53. Bullion rose almost 4.5% on the week.

The Federal Reserve announced as much as $2.3 trillion in additional aid for the Covid-19 on Thursday, including a pledge to provide support to risky corners of financial markets that have been hardest hit by fallout from the coronavirus pandemic. The Fed support came as U.S. jobless claims surged for a third straight week, rising by 6.6 million to bring to about 17 million jobs lost in just three weeks.

The U.S. Congress approved last month a separate $2 trillion Covid-19 aid package as the Trump administration and its Democrats rival came together in a bipartisan act to try and rescue an economy which analysts said would most likely slip into recession by the second half of 2020.

“All these sea of money that Congress and Fed is creating is proving to be a bonanza for gold, which the safe-haven crowd sees as a sure sign to take the yellow metal to $1,800 highs and possibly beyond the $1,900 record levels,” said Tariq Zahir at Tyche Capital Advisors, an oil-focused fund that also trades gold.

The $1,700 level had been an important resistance mark for gold. Until Thursday, COMEX futures breaking past the barrier only on four occasions this year – the first in January, then in March and twice earlier this week – before falling back almost immediately.