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Vladimir Zernov
Crude Oil

Oil Video 06.04.20


April 9, 2020 Is Now The Key Date For The Oil Market

Oil is in the pullback mode as OPEC+ meeting was postponed from Monday to Thursday. Previously, oil rallied on hopes that Russia, Saudi Arabia and other oil producers will be able to work out a deal to cut oil production by 10 million barrels per day (bpd).

Russia has indicated that it was ready to participate in the oil production cut deal. Kirill Dmitriev, the head of the Russian Direct Investment Fund and one of Russia’s top oil negotiators, stated that Saudi Arabia and Russia were very close to the deal.

At this point, it is not clear whether the U.S. will participate in the deal. Previously, U.S. President Donald Trump stated that he could impose very sustantial tariffs on foreign oil if there is no production cut deal.

The problem is that Russia and Saudi Arabia have no interest in bailing out U.S. shale companies which need much higher oil prices to survive in the longer term.

Currently, some of these companies are protected by their hedging programs, but their survival will be at risk if oil prices do not increase meaningfully in 2020. Also, not every oil producer has the technological opportunity to adjust oil production at short notice without doing damage to future production.

Near-Term Impact On Oil Demand Is Still Unknown

Obviously, the second quarter will be the most challenging in terms of supply/demand balance. However, estimates of the imbalance wary widely, and it’s very hard to forecast the actual situation since analysts do not know when virus containment measures will be lifted in major economies.

In this situation, world oil storage will continue to be flooded with oil even in the case of a 10 million bpd production cut. The 15 million bpd production cut would have been better, but I do not think that it’s possible given the continued disagreements between major oil producers.

In my opinion, the only scenario when the world oil production could be cut by 15 million bpd is the scenario of forced production cuts for those producers whose costs are too high or who run out of available storage for their oil.

However, even a 10 million bpd production cut would be a major step forward for the beaten oil market. Hopefully, OPEC+ will announce a deal on April 9, 2020.


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