Global oil producers agree on production cuts
Global oil producers, the OPEC++ group Thursday agreed in principle to cut 10 million barrels per day in oil production. What do the cuts mean for the oil and energy market? Oil prices reaction before and after the deal suggests not so well.
Global demand for oil has fallen with as much as 30 million barrels per day due to coronavirus. While the cut of 10 million barrels per day is massive, its still significantly lower than that needed to ‘balance’ the market, and oil price knows it.
Under the deal, whose full specifics are yet to be released, Russia will cut production by 2 million barrels per day while Saudi Arabia will reduce production by 4 million barrels per day. The rest of the OPEC members are yet to work out their production cut modalities. Energy Ministers from the G-20 countries are expected to meet on Friday for further talks on the production cuts. Oil Prices had hoped for a larger cut and reacted poorly to what is the largest production cut in OPEC’s history. On Thursday afternoon trading, The WTI benchmark had fallen 6.10% by 3:45 pm EDT, to $23.56 while the Brent benchmark fell a more moderate 2.5% to reach $32.02 per barrel.
On Thursday morning before the meeting, the International benchmark Brent crude traded at $34.06 a barrel, up by over 3%, while U.S. West Texas Intermediate (WTI) stood at $26.26, more than 4% higher. Both Brent and WTI had closed higher in the previous season.
Oil prices have lost over half their value since the beginning of the year and oil demand is forecast to slide as much as 30%. Analysts are skeptical about the effectiveness of the production cuts in shoring up oil prices as the demand shocks are too high to be corrected by a coordinated supply cut, according to a note by Goldman Sachs. Perhaps a decision by the G20 to add to strategic reserves would be positive for the market, one analyst noted.
Sources indicate that OPEC+ is expecting further cuts of up to 5 million barrels per day from the G-20 meeting tomorrow and that the United States has already indicated it will cut its production in response to natural market consequences, according to Oil Price.
Oil inventories are rapidly rising, and the market is still likely to be awash with cheap oil even when demand recovers. And the current volatile energy market could be an opportunity for those with the ability to take big risks – for the long term. At some point, the challenge of today will pass, and when it does, the risk-takers will be laughing all the way to the bank.
But this doesn’t mean that investors should be rushing to buy depressed energy stocks without rational analysis – all risks considered. Risk analysis should be the first and most important thing to do, as you consider buying what appears to be massively low-priced assets.