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Highlights

OPEC+ will cut 9.7 mil b/d of crude oil production

Physical market will still suffer from glut a bit longer

Flurry of Trump calls helps broker agreement

London — OPEC and its allies locked in a historic oil supply accord Sunday after Saudi Arabia, under pressure from the US, ended a four-day stalemate with Mexico that threatened to escalate a price war in the midst of the coronavirus crisis.

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The deal would see the 23-country OPEC+ alliance rein in 9.7 million b/d of crude oil production for May and June -- down from the 10 million b/d originally envisaged, as Mexico was allowed a more generous quota.

Combined with financially forced shut-ins of wells in the US and Canada, some further output restraints by Brazil, Norway and others, and purchases of crude by various countries to fill strategic petroleum reserves, the market could see up to 20 million b/d -- one-fifth of world supply -- removed over the next two months, officials said, though the exact math was unclear.

It is the biggest coordinated supply contraction covered by an international deal.

Saudi Arabia, OPEC's largest producer and the world's biggest crude exporter, will hold its output to 8.5 million b/d, down almost 30% from the record 12 million b/d it said it was producing this month.

Key non-OPEC partner Russia will also have an 8.5 million b/d quota, a 19% cut from the 10.5 million b/d of crude it was pumping, according to S&P Global Platts Analytics.

The collective OPEC+ cuts will ramp down to 7.7 million b/d for the second half of 2020, then to 5.8 million b/d for all of 2021 through April 2022.

The cuts are aimed at backstopping the market's slide, as coronavirus containment measures continue to erode global oil demand, and ending a punishing price war launched by Saudi Arabia and Russia.

But they may not be enough to stabilize the market in the short-term, with many analysts projecting an oversupply of at least 20 million b/d in the coming months and a dearth of oil storage capacity.

Front-month ICE Brent futures are down more than 52% since the start of the year. Prices in the spot market have slumped even further -- S&P Global Platts' Dated Brent benchmark is down 64% year to date.

The OPEC+ cuts may inspire a relief-driven bounce in futures prices, but the prompt market is likely to see a continued glut, as the new production quotas do not go into force until May.

Many key OPEC members, including Saudi Arabia, the UAE and Kuwait, have announced plans to hit record highs in production in April, which will have to be cranked back down.

"While the deal will lend support down the curve, we expect Dated Brent to trade a substantial discount to front month ICE future, meaning that the benefits for OPEC+ look somewhat uncertain," said Chris Midgley, global head of analytics for S&P Global Platts.

Russian energy minister Alexander Novak said the two-year length of the deal was to see through the coronavirus pandemic's peak and then an eventual economic recovery.

"If demand grows faster, then this period of action may be reduced," Novak said in a statement.

Compliance will also be key, as production cuts on this scale have never been prescribed before, and several OPEC+ members -- notably Russia, Iraq and Nigeria -- have a spotty history of adhering to their quotas.

BATTLING DOWN TO THE WIRE

The hard-won deal took a weekend of negotiating after an OPEC+ emergency meeting stalled Thursday over Mexico's recalcitrance to cut more and a G20 summit Friday failed to break the deadlock.

Ministers were under pressure to get an agreement before the open of crude trading in Asia, but were stymied by the test of wills between Saudi Arabia's all-in-or-nothing stance on collective production cuts and Mexico's elevation of its state oil company as the centerpiece of its economic development plans.

The proposed agreement had called for Mexico to claw back 400,000 b/d, proportional to what the other members were asked to commit to. Mexico, having touted plans for billions of dollars of investment in its state oil company, counter-offered with a 100,000 b/d cut.

Sources said Saudi Arabia had threatened to walk out of the deal and reignite a pitched oil price war if Mexico did not capitulate, but intervention by Russian President Vladimir Putin and especially US President Donald Trump helped persuade the kingdom to apparently give in.

The US is not a member of the OPEC+ coalition, but Trump's active petrodiplomacy highlighted the pressure he was under to rescue the ailing US oil industry -- a key constituency for his electoral prospects -- while also being constrained by US antitrust regulations and his own free market leanings from mandating American output cuts.

At the G20 meeting Friday, the US did not offer any voluntary production cuts, but only a vague commitment to use its Strategic Petroleum Reserve to lock away barrels that would otherwise exacerbate the oil glut.

Trump held numerous phone calls with OPEC+ leaders over the weekend, according to people familiar with the matter, who asked not to be named because the discussions were private.

Several US senators from oil producing states, facing a wave of layoffs and bankruptcies, also held a tense phone call Saturday with senior Saudi officials, including energy minister Prince Abdulaziz bin Salman, to pressure the kingdom into making a deal with its OPEC+ counterparts, suggesting a withdrawal of US military aid if no supply agreement materialized.

"We have to make sure these countries hold up their end of the deal, and we will be watching every step of the way," said Senator Kevin Cramer, a North Dakota Republican who often advises Trump on energy matters.