Next Week, Oil Set To Digest The Results Of OPEC+ Meeting

Oil Video 10.04.20.

OPEC+ Countries Manage To Agree On Production Cuts

Yesterday, oil had a very volatile trading session as traders tried to guess the outcome of the OPEC+ meeting. The deal has been reached, but it remains to be seen how the market will react to it during the next week.

According to the terms of the deal, OPEC+ will decrease its oil production by 10 million barrels per day (bpd) from May 1, 2020 to June 30, 2020. Then, production adjustment will total 8 million bpd from July 1, 2020 to December 31, 2020.

This production adjustment will be followed by a 6 million bpd adjustment from January 1, 2021 to April 30, 2022. For all countries except Saudi Arabia and Russia, the baseline for production cuts is the oil production in October 2018. In turn, Saudi Arabia and Russia will base their cuts on the level of 11 million bpd.

Mexico offered production cuts of no more than 100,000 bpd and did not sign the deal. However, recent reports suggest that the U.S. agreed to help Mexico with the deal. While there have been no official confirmation yet, I have little doubts that Mexico will ultimately join the cuts, and OPEC+ countries will cut oil production by 10 million bpd.

Will Other Countries Join OPEC+ In Cutting Oil Production?

The problem is that a 10 million bpd cut is not sufficient to balance the market because the near-term hit to oil demand could be as high as 30 million bpd.

The biggest risk for the oil market is to run out of oil storage so additional production cuts are necessary to provide more safety cushion in case the situation with virus containment measures does not improve rapidly.

Now, OPEC+ countries want G20 countries to join their efforts and deliver an additional oil production cut. It is widely expected that such a production cut should total 5 million bpd in the near term.

While oil prices may experience upside if additional production cuts are implemented, the key reason for the cuts is to prevent oil prices from falling further rather than boosting them.

In the longer run, improvements on the oil demand front are the only catalyst that can provide sufficient support for oil prices and get them back towards more reasonable levels. As major economies are set to spend the whole April in lockdown, relief is not coming soon for the oil market.