Oil Price Fundamental Weekly Forecast – Production Cuts Too Small, Deal Too Short to Make Major Difference

OPEC, Russia and other oil producing nations including the United States overcame a slight snag and finally agreed on Sunday to cut output by a record 9.7 million barrels per day for May-June, representing around 10% of global supply, to support oil prices amid the pandemic, according to Reuters. The cut is the single largest output cut in history.

The Back Story

On Sunday, OPEC and its allies held its second emergency meeting in four days in an effort to finalize an agreement in an effort to prop up falling prices as the coronavirus outbreak continues to destroy demand.

OPEC+ initially proposed cutting production by 10 million barrels per day – amounting to 10% of global oil supply, on Thursday, but Mexico opposed the amount it was being asked to cut, holding up the final deal. On Friday, when the deal was in jeopardy, President Trump said the U.S. would cut production in an effort to get Mexico “over the barrel.”

Mexico finally agreed to cut 100,000 barrels per day, instead of the 400,000 barrels per day it had initially been asked to cut. Once that hurdle was overcome, it was just a matter of finalizing the agreement, which took place on Sunday.

Some Details

The specific production numbers weren’t released, but we do know that the 9.7 million barrels per day cut will begin on May 1, and will extend through the end of June.

Weekly Forecast

We’re probably looking at a choppy, two-sided trade over the short-run as traders digest the production cut news. The agreement isn’t particularly bullish so we’re not looking for a change in trend. However, we could see a floor form at least temporarily. Furthermore, the production cuts are smaller than what the market needed and it’s only going to slow down the stock building constraints problem. However, most traders agree the worst of the selling may be over for now.

The move by OPEC+ is not big enough to plug the near-term imbalance, which could reach 15 to 20 million barrels per day. Additionally, storage tanks are expected to top out in May. Furthermore, the cuts are too short, ending in June. This is hardly enough time to bring stability and restore support to oil prices. OPEC may have to revisit the problem in June.

The cuts may make a difference during the second half of 2020, but that will likely accompany an uptick in demand if the world can gain control of the coronavirus outbreak.