Update: Well, that didn't take long. Less than an hour after news of its objection to the OPEC+ production cut hit, with Mexico even threatening to quit OPEC and become an observer, the OPEC member state has folded and has agreed to join the flock.
- MEXICO AGREES TO OPEC PLUS PRODUCTION CUTS, SOURCES SAY
- ALL OPEC PLUS MEMBERS AGREE TO CUT OUTPUT, SOURCES SAY
It's unclear what the terms of the backroom deal were that prompted Mexico to change its mind, but the fact that Mexico will now produce even less out despite the slump in oil prices, will only add further pressure on the Mexican economy and soon lead to new all time lows in the MXN peso.
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There is a reason why we noted earlier that the "deal" reached between Russia and Saudi Arabia had not been ratified by any other R-OPEC members: because it was unlikely the draconian caps and production terms imposed by the two super producers (23% across the board cuts for everyone) would be accepted by all oil producing nations.
Sure enough, just a few hours after the deal emerged, we got latest OPEC+ drama twist, Mexico - whose economy is already reeling between a collapse in production and a surge in covid cases - and refused to go want to go along with the cuts and has asked if it can withdraw from the OPEC+ group and become an observer.
As Bloomberg notes, "so far, its involvement had just seen it contribute natural declines in output, but it clearly doesn’t want to contribute active cuts." But more importantly, Mexico's threat "just goes to show the weakness at the heart of the OPEC+ arrangement. It welcomed countries that offered nothing but a natural decline in output as “cuts” simply to make the numbers look bigger. Now it has the embarrassment of watching one of them threaten to leave after being asked to make a real sacrifice."
That said, as BBG concludes, losing Mexico seems a small price to pay for getting a deal done as it never contributed any real cuts anyway.
A bigger problem is that as Rystad Energy’s head of analysis Bjornar Tonhaugen says, echoing what we said earlier, the proposed output cuts are “far lower than what the market needs at the moment”, with the Mexican rejection suggesting that even those cuts may prove fragile.