Oil Prices Continue To Rally On Hopes For A Major Oil Production Cut DealOil rallies as OPEC+ countries prepare for an emergency meeting to discuss oil produciton cuts.
OPEC+ Meeting is Scheduled For April 6
The energy ministry of Azerbaijan has stated that OPEC+ meeting will take place on April 6. Yesterday, U.S. President Donald Trump indicated that Russia and Saudi Arabia would cut oil production, creating a major rally in the oil market.
Currently, the expectations are centered around a production cut of 10 million barrels per day (bpd). However, it is clear that Russia and Saudi Arabia alone would not be able to make such a production cut. Other oil producers will have to participate in the deal.
It remains to be seen whether the U.S. is ready to participate in the cuts since it has many independent oil companies while anti-trust laws limit coordinated action.
At the same time, it’s hard to believe that Russia and Saudi Arabia will want to bail out the U.S. shale companies at a time when they could soon be forced to cut their oil production due to low prices and the lack of storage capacity.
Leonid Fedun, the vice president of the Russian oil company Lukoil, has indicated that the U.S. should participate in the deal. The oil market currently assumes that some deal would be reached, but it is clear that negotiations would be extremely complicated.
Is A 10 Million Bpd Cut Sufficient Enough?
Fatih Birol, the head of the International Energy Agency, stated that a production cut of 10 million bpd would result in an oversupply of 15 million bpd in the second quarter.
Goldman Sachs has similar estimates, projecting that the hit to oil demand is about 26 million bpd. Brazilian oil company Petrobras stated that negotiations about the production cut deal are irrelevant because the coronavirus crisis had dealt a huge blow to oil demand.
In the worst case scenario, the world oil production will be adjusted “automatically” when oil producers run out of storage. This is the scenario that everyone wants to avoid.
The main problem is that any oil production cut deal has no influence on oil demand which is hit hard by virus containment measures. Thus, the ultimate health of the oil market will depend on the situation on the coronavirus front rather than on production cuts.