OPEC+ production deal: back from the brink

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After a 4-day marathon of global meetings and arduous and sometimes frustrating negotiations involving the U.S., Mexican, and Russian Presidents as well as the Crown Prince of Saudi Arabia, the OPEC+ group agreed to collectively cut production in May and June by 9.7 MMb/d. IHS Markit said on Monday the OPEC+ group also agreed to return to market management by committing to a series of cuts through April 2022 to manage the post COVID-19 cycle and the inventory overhang in the next 2 years.

The negotiations have been bogged down since Thursday on Mexico’s participation, a minor issue that took a very long time to be settled.

This historical cut, paired with the expected declines and shut-ins likely to occur in the next few months in the United States, Canada and some other countries, promise to remove up to 14 MMb/d in May and June. The group of producers is also mindful of the scale of the demand collapse of around 20 MMb/d and will likely attempt to communicate as close a supply commitment as possible to this figure. Stepping away from a destructive price war, the return to market management by Saudi Arabia and Russia backed by the United States and a very involved President Trump, marks a physical and psychological inflection point for the oil market.

“This is a critically-needed relief in the face of declines in crude demand estimated at around 20 MMb/d. Stepping away from a destructive price war, the return to market management by Saudi Arabia and Russia and backed by the United States and a very involved President Trump, marks a physical and psychological inflection point for the oil market,” said Roger Diwan, vice president financial services, IHS Markit.

Saudi Arabia and Russia will reduce output to 8.5 MMb/d each, from an agreed common baseline of 11 MMb/d, or the highest level of Saudi production in the last two years. This 2.5 MMb/d parity in the size of the cuts announced, and the apparent concession by Moscow to this Saudi request reflects the recognition by Russian producers that their crude markets in Europe have evaporated. This is a formalization of raw market strength and reflects most probably the reality of the physical market in the second quarter.

On a global basis, these cuts remove the specter of an aggressive price war and lowers the likelihood that global tank tops will be breached but does not solve the distress physical markets are likely to face in May and June. The record differentials between global benchmarks and physical prices reflect the dual reality of hope and despair, with Brent futures now at $33/bbl, while Dated Brent trades around $24/bbl. Regional benchmarks and well-head prices will continue to show further discounts, and are likely to force shut-ins above and beyond the supply agreement. The 3.7 MMb/d announced declines by the United States, Canada and other producers reflect these distressed economics.

The direct involvement of President Trump to forge this historical deal is the most unusual aspect of all and reflects his visible concern for U.S. shale producers. A catastrophic price scenario would have wiped out a large number of producers in the United States, but this improved scenario will not change the fact that the production decline unfolding in the United States will be in the same range as the forced shut-ins or cuts agreed today by Russia and Saudi Arabia.

“The direct involvement of President Trump to forge this historical deal is the most unusual aspect of it and reflects his visible concern for U.S. shale producers,” Diwan said.

Source: IHS Markit

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