Oil Video 09.04.20.
Key Negotiations Begin
Oil is having a choppy trading session, waiting for the results of the key OPEC+ meeting. Early reports suggest that both Russia and Saudi Arabia are ready to commit to meaningful production cuts but they want other countries to participate in the deal.
The U.S. believes that its oil production will decline “automatically” so there is no need to get into formal production cut agreements. Russia is not satisfied with this approach since it fears that U.S. shale oil companies will simply increase their market share at the expense of OPEC+ countries.
Russia has indicated that it may cut is oil production by as much as 2 million barrels per day (bpd) if the agreement is reached. However, it is not clear how much time will be required to implement such production cuts.
Previously, Russia has stated that it was difficult for the country to cut oil production due to the nature of deposits and cold climate. Saudi Arabia and U.S. are in better position to quickly adjust their oil production, but all major producers will have to participate in the deal – or there will be no deal at all.
Is The 10 Million Bpd Cut Big Enough To Improve The Supply/Demand Balance?
Russian oil company Rosneft stated that it believed that a 10 million bpd cut would be sufficient enough to rebalance the market. Rosneft estimates that 2020 oil demand will be lower by 5 million – 7 million bpd compared to 2019 levels.
In my opinion, this is an optimistic estimate. At this point, it looks like major countries will start to re-open their economies in May. However, everyone will be afraid of the second wave of the virus since the world economy cannot take another blow.
Thus, virus containment measures will be lifted gradually. In such environment, it’s hard to expect that oil demand will soon return to normal levels. While the equity market appears to be very optimistic despite the negative data, oil is a physical product, and real-life economic activity will ultimately dictate its price.
The economic projects look grim, especially in the near term. PIMCO, which is one of the biggest investment funds, predicted that U.S. GDP could fall by as much as 30% in the second quarter and 5% for the full year.
Similar hits to GDP would be seen all over the world. In this environment, a 10 million bpd cut may not be sufficient enough to balance the market. However, it would be a huge step forward if oil producers overcome their differences and agree to any coordinated action to curb supply.