Oil prices dropped on Friday as traders feared that an Opec deal to slash global supplies by 10% would not offset a historic drop in demand due to the coronavirus outbreak.

The price of Brent crude fell nearly 2.5% to $31.82 per barrel on Friday, despite news that the oil cartel and allies – known as Opec+ – had reached a deal that would end a price war between Saudi Arabia and Russia that threatened to flood the market with more oil than the world could use.

Mexico initially cast some doubt over Opec’s plans, after apparently refusing to sign up to its share of cuts, which would have been 400,000 barrels per day (bpd). The country instead offered to cut 100,000 bpd.

The country signalled on Friday that the US may be willing to make further cuts to its production in order to allow Mexico to make less stringent reductions. Mexican president Andrés Manuel López Obrador said that US president Donald Trump had agreed to help out by cutting additional US output.

However, G20 energy ministers did not mention production cuts in a statement released after a virtual summit hosted by Saudi Arabia on Friday.

The meeting had been expected to seal the deal on production cuts but the statement pledged that the G20 would work together to ensure oil “market stability”.

“We commit to ensure that the energy sector continues to make a full, effective contribution to overcoming Covid-19 and powering the subsequent global recovery,” the statement said.

The cuts by the oil producer group are expected to reduce global supplies by 10%, or 10m bpd, in an effort to raise prices which hit an 18-year low of $22 per barrel last month. It will also push other oil-producing states, including the US, to cut a further 5m bdp to help navigate the deepest oil crisis in decades.

Global oil fuel demand has plunged by as much as 30% or 30m bdp during the coronavirus outbreak, as steps to fight the disease have grounded planes, cut vehicle usage and curbed economic activity.

Oil price rebounds on hopes Saudi Arabia and Russia will reach deal Read more

Even if Opec+ succeeded in reducing output by 15m bpd, it may not be enough to prop up prices while demand continues to drop during the lockdown. Despite the oil cartel’s best efforts, global storage facilities could still quickly fill up.

Analysts from Goldman Sachs are forecasting that the coronavirus crisis will slash demand by 19m bpd in April and May. “Such cuts, if agreed upon tomorrow, would still be too little and too late to prevent a decline in prices in coming weeks as storage capacity becomes saturated.”

But Stephen Innes, chief global markets strategist at AxiCorp, an online currency trading platform, said that while the deal will only partially offset the decline in oil prices, “that’s what it was supposed to do”.

He added: “The storm clouds for oil prices will only completely dissipate when lockdowns are lifted.”

Innes also said that initial worries over Mexico’s initial refusal to sign the Opec+ deal were overblown. “Mexico’s secretary of energy, Rocío Nahle, was annoyed about being held over a barrel – as Saudi Arabia was trying to strongarm a commitment – and rightly so she was. But the amount of ink being spilled suggesting the oil deal will fall apart on 300,000 barrels, 3% of the total cut, is flat-out absurd.”

Trump, who has said US output was already falling due to low prices, has also warned Riyadh it could face tariffs on its oil if it did not cut enough to help the US oil industry, whose higher costs have left it struggling with low prices.

Both Opec and Russian officials have said the scale of the crisis required involvement of all producers. “We are expecting other producers outside the Opec+ club to join the measures, which might happen … during G20,” Kirill Dmitriev, head of Russia’s wealth fund and one of Moscow’s top oil negotiators, told Reuters.

The US, whose output has surged to surpass Saudi and Russian production since it began large-scale fracking, was invited to Thursday’s Opec+ talks, but it was not clear whether it had joined the video conference. Brazil, Canada and Norway were also invited.