Oil Mixed After Historic Oil Production Cut Deal

Oil Video 13.04.20.

Mexico Gets A Free Ticket

Over the weekend, OPEC+ countries managed to finalize the historic oil production cut deal and will cut oil production by 9.7 million barrels per day (bpd).

Originally, the deal implied a production cut of 10 million bpd but Mexico refused to cut oil production by more than 100,000 bpd as it tries to revive its oil industry. The deal is so important to the market that other oil producers decided to let Mexico stay with a 100,000 bpd cut.

Non-OPEC+ countries are expected to contribute cuts of 4 million – 5 million bpd, although there’s no official deal on this front. Norway has already stated that it will soon announce its decision on the potential production cuts. Other major producers will likely follow Norway’s example in the coming days.

The U.S. may not announce any official production cuts since anti-trust laws prohibit it from cooperation on the oil price front, but the country’s production is set to decline naturally because of low oil prices.

Is This Enough?

So far, the production cut deal did not bring any meaningful oil price upside. WTI oil, which has traded as high as $29 per barrel on hopes for a production cut deal, is currently down below $24 per barrel.

Goldman Sachs argues that the historic oil production cut deal will not be sufficient enough to offset the hit dealt by virus containment measures. According to Goldman Sachs, the hit to demand could average 19 million bpd in April – May.

It’s worth noting that the oil production cut deal begins in May, so oil producers will mostly continue to flood the market with oil in April.

There are signs that some oil producers are already starting to prepare for the future production cuts. For example, Russia’s average oil production declined to 11.24 million bpd on April 1-12 from 11.29 million bpd in March, according to Reuters.

It remains to be seen whether all oil producers will be able to cut their production according to the terms of the deal. For some of them, such production cuts will be technologically challenging.

Saudi Energy Minister stated that he believed that effective supply cuts would total 19.5 million bpd if 200 million barrels would be purchased for strategic reserves as planned.

However, reserves have limited capacity, and the oil market still needs improvements on the demand front to have sustainable upside.