Oil Price Fundamental Daily Forecast – Look for OPEC+ Compromise that Falls Short of Demand Losses

U.S. West Texas Intermediate and international-benchmark crude oil futures are down nearly 2% on Friday as concerns over global oil demand and economic growth caused by the coronavirus epidemic were heightened by worries over non-OPEC crude producers’ delay in agreeing to further production cuts designed to trim oil supply and stabilize prices.

At 08:48 GMT, April WTI crude oil is trading $45.14, down $0.76 or -1.66% and May Brent crude oil is at $49.12, down $0.87 or -1.76%.

Reuters reported on Thursday that OPEC pushed for crude output by OPEC and its allies – a group known as OPEC+ – to be cut by an extra 1.5 million barrels per day (bpd) in total until the end of 2020. The call came ahead of an OPEC+ meeting scheduled for Friday in Vienna.

Non-OPEC states were expected to contribute 500,000 bpd to the overall extra cut, OPEC ministers said. But Russia and Kazakhstan, both members of OPEC+, said they had not yet agreed to the deeper cut, raising the risk of a collapse in cooperation that has propped up crude prices since 2016, Reuters reported.

Friday’s price plunge indicates that traders are increasing bets that the proposed deal will collapse, but some believe Moscow will ultimately endorse the agreement.

“If it (Russia) says no, the entire union could collapse – and with it any new bilateral trade and investment deals in the pipeline as well as the strategic influence Moscow has secured by participating in the production agreement,” RBC Capital Markets said in a research note.

“There will be a flurry of high level calls between Moscow, Riyadh and Abu Dhabi to get the deal done.”

Some traders are saying the proposed cuts will not be enough to offset the so far unknown drop in expected demand. Michael McCarthy, chief market strategist at CMC Markets thinks concerns about the macroeconomic environment are overwhelming the positive impact of the proposed big output cuts.

Goldman Sachs said that even with the deep cut, the OPEC+ deal with not be able to prevent a global oil market surplus in the second quarter, or sequentially lower prices in the coming weeks.

“Ultimately a rebound in demand, not supply cuts, will be the necessary catalyst for a sustainable rebound in prices,” the bank said, while maintaining its Brent price forecast at $45 a barrel in April.

Daily Forecast

Look for a strong short-covering rally if OPEC+ agrees to the proposed 1.5 million bpd production cuts until the end of 2020. Gains could be limited if OPEC+ agrees to a smaller reduction or a shorter-duration. My guess is there is going to be some kind of a compromise between the OPEC-led Saudis and the producer-led Russians.