Tomorrow is the first of two HUGELY important days for crude oil markets.
On Thursday, OPEC+ members will be coming together to discuss proposals to cut output to stem downside in the crude oil market as a result of demand destruction caused by the Covid-19 outbreak and a resolution to the Saudi, Russia price war. The meeting was initially supposed to occur on Monday but was delayed to give more time for negotiations.
Around one week ago, US President Trump surprised markets with an announcement that he had spoken the Saudi Crown Prince Mohammed Bin Salman (known as MBS) and with Russian President Putin and both had agreed to BIG crude oil production cuts, which he at the time said could be as much as 10-15mln BPD.
Despite widespread skepticism at the time, he turned out to be telling the truth; the Saudi’s quickly arranged an emergency OPEC+ meeting, which the Russians agreed to, potentially putting an end to their oil price war that has hurt crude oil prices so heavily over the past near two months.
OPEC+ has since been in negotiations, and it seems the most likely outcome (if a deal can be reached) would be for around 10mln BPD to be taken offline, with the Saudis cutting 3mln, the Russians 1.5mln and the US and Canada 2mln BPD. The consensus is pretty much that the Saudis and Russians will only cut output IF the US (and others like Canada and Brazil do as well).
This might be the big pitfall. This week, some controversy has emerged regarding US cuts. In the last three weeks, US output has declined naturally, given that prices are too low at present for US producers to make any money (latest figures had US production at down 600k BPD this week). The US sees this as them cutting output, but Russia today said that any natural response of oil producers to market conditions would not suffice; by the sounds of it, Russia is going to push for an outright commitment to cut output from the US. As ING this morning noted, “mandated cuts would likely mean no deal”.
We will likely not know the full picture until after the G20 energy ministers meeting on Friday, however. Here big non-OPEC+ players, such as the US, Canada and Brazil, will discuss proposals for global cuts. Should opt not to go with cuts, this will b
Tomorrow’s OPEC+ meeting will be the first test for crude markets.
Should OPEC deliver the expected 10mln BPD cuts, there may be something of a relief rally, but the move higher in crude markets would likely be limited. As many analysts have noted, global oil demand has shrunk by some 30mln BPD due to covid-19, so how much is a 10mln BPD cut going to make?
If they fail to come to a deal, crude oil markets are likely to be crushed. It was only the hope that a deal could be done that held WTI crude above the $20 mark - this level would be likely to go in this outcome.
Should crude pass its first test, the next will be the G20 Energy Minister meeting on Friday. As noted above, this is where we will find out if countries outside of OPEC+ are willing to play ball, thus making or breaking the OPEC+ deal agreed the day before.
Should they indicate an unwillingness to cut, we are likely to see crude prices crushed.
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