John Hall Comment on the 9th (Extraordinary) OPEC and Non-OPEC Ministerial Meeting

Saudi has recently managed to hit 12mbpd, so for them it’s not so critical, but, as a consequence, they can share a major part of the cut with Russia with each reducing to 8.49mbpd. In fact, Saudi and Russia have set their agreed base level at 11mbpd. The notice states that the OPEC 10 will cut by 6,085mbpd from 26,683 to 20,598mbpd and non-OPEC will cut by 3,915mbpd from 17,170 to 13,255mbpd. Mexico has been charged with cutting by 400,000bpd and has refused to accept this level which, in effect, technically invalidates the deal. However, since then news has come that the Mexican President has discussed the situation with President Trump who, although not a party to this Meeting, has supposedly agreed that Mexico can stick to its 100,000bpd. Of course, if this is not ratified by OPEC+, it could mean that the plan to reduce by 10mbpd doesn’t happen. I think it unlikely!

Now, the 10mbpd cut is effective from 1st May until 30th June, which means they can all pump as much as they can between now and then! From 1st July, the figure drops to 8mbpd until 31st.December and then from 1st January, 2021, it will fall to 6mbpd until April, by which time there will have been several reviews and Meetings to decide upon next steps. What we have to remember is that the supply-demand imbalance could be as high as 30mbpd and a recent figure from OPEC has warned of a figure of 14.7mbpd, so, this cut, although the largest ever, is probably not even half way to what is actually needed to supposedly re-balance the market!

The oil price moved up in anticipation of something happening, as it always does before an OPEC Meeting but then fell back slightly once the numbers were known. However, Saudi may have had the foresight to pitch the Meeting just before the G20 Meeting at which other major producers would be present. If we assume that the 10mb cut will go ahead, with or without Mexico, OPEC and its allies have made a significant gesture. With oil demand usually around 100mbpd, the parties to this agreement are only responsible for 44% of that. Therefore, they can justify that their proposal is fair in the situation and that other producers who make up the remaining 56% could cut on a pro-rata basis and take out a further 13mbpd to fully balance the market. The US with its 12mbpd on the same basis as OPEC+ could also reduce by 23% and contribute a cut of 2.76mbpd if it wished to participate.

The G20 agenda is all about oil and balancing the market with OPEC+ and other producers present. OPEC+ can set the scene at the rest can make their own minds up as to what needs to be done. Will they do it? Probably not in the same way or to the same level and the oil price will remain depressed. They will have presentations from IEA, OPEC and the IEF with each supposedly sending out the same compelling message that further action is required. The US shale industry is already under pressure and it would seem that much it could fail in the coming months. Of course, as we have seen before, the operating companies may fail, leaving their assets in and on the ground for their banks to pick up and dispose of later. My guess is that the US will claim that as the market is depressed the US producers will not need to produce so much anyway so that in effect can be called a cut. This won’t be good enough, in my view, as their has to be a sustainable commitment to match the OPEC+ timescale running through to April 2021.

Brent closed yesterday at $31.48 and WTI at $22.76 with the OPEC Basket at $21.19 – all down on the news of the 10mbpd cut. The market probably wants 20mbpd but even more probably needs 30mb

As an aside, we have to recognise that demand for Petrol has probably fallen by around 70% although that for diesel won’t be so great as transportation is still running, particularly with the increase in home deliveries that has come about. For the motorist that can legitimately use a vehicle there should be some cheaper deals around. However, the caveat that I shall put in is that because of the drop in demand, retailers (supermarkets) are probably still stocked up with fuel that they bought last month before the price drop. Furthermore, we are talking about a drop in the price of cruse as opposed to a drop in the price of petrol & derv which will follow through. My guess is that lower prices will filter through but much will depend on the demand flow picking up.


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