The Organization of the Petroleum Exporting Countries and its allies have agreed to do what they can to stabilize the oil market, but they cannot force the rest of the world to work with them.
During an hour-long marathon webinar session on Thursday, OPEC and allied producers, collectively known as OPEC +, agreed to reduce overall crude oil production by $ 10 million. barrels per day from May 1 to June 30 of this year. The reductions would then be relaxed to 8 million barrels per day from July 1 to December 31, followed by 6 million barrels of cuts from January 1, 2021 to April 30, 2022.
“The plan could be enough to prevent a further collapse in prices, but not enough to start a rally.”
“The plan could be enough to prevent a further collapse in prices, but not enough to spark a rally,” said Marshall Steeves, energy market analyst at IHS Markit. This is not a failure, but “not a panacea either,” he told MarketWatch on Friday.
The benchmark for reductions would be oil production in October 2018, with the exception of Saudi Arabia and Russia, which will each cut from a benchmark of 11 million barrels per day.
The agreement, however, is “conditional on Mexico’s consent,” according to the OPEC + statement. Mexico would not have accepted the plan and wants to reduce its share of production cuts. The next webinar will be on June 10.
Lily: OPEC + crude cuts “will not be enough to provide lasting and restorative price support”, experts say
If the parties concerned do not respect the agreement they have reached, the possibility of “single-digit” oil prices is on the table, said Peter McNally, global sector manager for investment research firm Third Bridge. . “Compliance is always a major issue and a source of debate” between OPEC and their allied partners.
Judging by the reaction of oil prices following initial reports of a drop of 10 million barrels per day, which were released before the settlement of oil futures on Thursday, traders and analysts didn’t certainly weren’t impressed.
World reference Brent petroleum of June
fell $ 1.36, or 4.1%, to $ 31.48 per barrel on ICE Futures Europe and the US benchmark May West Texas Intermediate gross
lost $ 2.33, or 9.3%, to finish at $ 22.76 on the New York Mercantile Exchange Thursday, before the official statement from OPEC +. Trading was closed for the Good Friday holidays.
In order to provide “lasting and restorative support for oil prices”, OPEC should guarantee “firm and sustained cuts almost twice the size of the cut of 10 million barrels per day until the end of the year, said Chris Midgley. , global analysis manager, S&P Global Platts.
A “blow” in the fall in the price of oil
Countries around the world have imposed travel restrictions, dramatically reducing demand for oil to stem the spread of COVID-19.
“The magnitude of the drop will only reduce the drop in oil prices as global demand has dropped more than 30% since the start of the pandemic,” said Matt Weller, global market research manager at GAIN Capital, in a press release. Friday note. “The two main components of oil demand, car / bus demand and airline fuel demand, are not expected to increase significantly until the fall.”
And now that OPEC and non-OPEC Russia “have made up their minds, the rest of the support for the oil industry will have to come from elsewhere,” he said.
The group of 20 energy ministers met on Friday to solicit the participation of the United States, Canada, Brazil and other key producers outside OPEC + to join its efforts said Herman Wang, editor of S&P Global Platts, in a note. Friday.
See also:Why an agreement between Saudi Arabia and Russia to reduce oil production would mean nothing without American cooperation
The G20 energy minister signed the final statement despite the disagreements, Russian news agency TASS reported on Friday, citing two sources who attended the meeting. Another source told TASS that no agreement on reductions in oil production was reached because the issue was not even raised at the meeting.
Mexican President Andrés Manuel López Obrador said Friday at a daily press conference that his country would cut oil production by 100,000 barrels a day under the OPEC + deal, according to the Wall Street Journal. The pact had originally asked Mexico to cut production by 400,000 barrels a day. Obrador said Thursday night that President Donald Trump, on a phone call, pledged to cut U.S. production by an additional 250,000 barrels a day to compensate for Mexico.
Trump said on Friday at a press conference that the United States would “help Mexico” with production cuts “if that was acceptable” and that Mexico would “reimburse” the United States on a date later.
The United States speaks, but no action
Some non-OPEC + oil producers observed the OPEC + meeting, including Argentina, Colombia, Ecuador, Egypt, Indonesia, Norway, Trinidad and Tobago , but the OPEC + statement did not mention any participation by the United States, which is the world’s largest oil producer.
At a press conference on Thursday evening, however, Trump said he spoke by phone to Russian President Vladimir Putin and King Salman of Saudi Arabia to discuss the oil markets, but did not share details.
Trump has expressed concern that the decline in demand for oil, which has lowered US benchmark prices by almost 63% since the start of the year, will cause further misfortune for US oil companies, some of which have announced production reductions.
Lily:Oil companies cut production, bracing for ‘lower prices for longer’
In remarks made at the G20 meeting, Dan Brouillette, secretary of the US Department of Energy, said that US oil production will see a reduction of almost 2 million barrels a day by the end of this year and that the country will open its strategic oil reserve to “store as much oil as possible” to remove excess oil from the market.
He said the United States “would seek more opportunities to alleviate the harm felt by our producers”, but did not mention any voluntary cuts in US oil production.
“Trump’s willingness to help the oil cuts appears to be limited to a free market response, not to cuts imposed by the United States,” Stewart Glickman, energy analyst at CFRA Research, told MarketWatch Friday. “Essentially, his approach has been that OPEC + should do almost all of the heavy lifting to restore oil prices.”
Storage capacity, on the other hand, is a growing concern. If demand continues to fall, inventories at the US delivery center in Cushing, Okla. “Will increase, refinery storage will increase, floating storage will increase, but there is a limit – and we are probably approaching that limit in May or perhaps June,” said Glickman.
If the OPEC + agreement collapses and the G20 does not help their own cuts, I think there is an upheaval in the looming industry, “he said.
Lily:Tightening image of oil storage underscores urgent production cuts
Texas to the rescue?
There may still be hope in the United States. There is a chance that “states will take action that requires reductions, even if the federal government does not,” said Glickman.
The Railroad Commission of Texas (RRC) regulates the activity of the oil fields in Texas, and since most of the Permian Basin is in Texas … and because the Permian is the nerve center of American shale oil, Texas is “In a unique position to do something about it if the federal government doesn’t want to,” he said.
The CRR will hold a virtual meeting on April 14.