Historic crude oil production reduction agreement improves market psychology

Source: Xinhuanet 　April 14, 2020

After many days of negotiations, the Organization of Petroleum Exporting Countries (OPEC) and Russia and other non-OPEC oil-producing countries finally reached a historic output reduction agreement on the 12th. Analysts believe that although the reduction in output is not enough to reverse the current situation of severe oversupply of crude oil, reaching an agreement will help improve market psychology and will help the crude oil market achieve supply and demand balance in the long run.

According to a statement issued by OPEC, the reduction in output from May to June this year was 9.7 million barrels per day, from July to the end of the year was 7.7 million barrels per day, and from January 2021 to April 2022 was 5.8 million barrels per day.

On the 9th, OPEC and non-OPEC oil-producing countries reached a preliminary agreement and planned to reduce the average daily output by 10 million barrels from May to June this year. Due to Mexico’s opposition to the reduction in production quota allocated to it, a final agreement could not be reached that day.

OPEC Secretary-General Mohammed Barkindo made a speech at the ministerial video conference between OPEC and non-OPEC oil-producing countries on the 12th and warned that if the agreement cannot be finalized before the market starts trading on the 13th, the market will react negatively and fall into uncontrollable mess.

To the market's gratification, OPEC and non-OPEC oil-producing countries have finally overcome their differences, and this historic production cut agreement is not dead. According to the agreement, Mexico’s production cut is 100,000 barrels per day instead of the 400,000 barrels per day previously recommended.

After the agreement was reached, international oil prices rose significantly. As of about 10 am Beijing time on the 13th, the price of light crude oil futures delivered by the New York Mercantile Exchange in May rose by 5.36%; the price of London Brent crude oil futures delivered in June rose by 4.45%. However, oil prices subsequently dropped significantly.

Analysts believe that for the energy industry and the international crude oil market, production cuts have a certain stabilizing effect. However, due to the impact of the new crown epidemic on the global economy, the demand for petroleum, diesel and jet fuel and other related petroleum products has declined sharply. Although the production reduction agreement has historical significance, the scale of production reduction is still insufficient.

Magnus Niswin, head of analysis at Resta Energy, said the agreement is at least \"short-term relief\" to the energy industry and the global economy. Although the scale of production cuts is smaller than what the market needs, \"avoids the worst Case\".

Ann Louis-Hittel, vice president of macroeconomic market research at the energy consultancy Wood Mackenzie, believes that the agreement will have a significant and rapid impact on market supply and demand fundamentals.

Ed Morse, head of global commodities at Citibank, said unprecedented production cuts will have a significant impact in the second half of the year, and oil prices are expected to rise to around $45 per barrel by the end of this year.

However, the founding partner of the US \"reinvestment\" capital management company John Kirdoff believes that even if production is reduced, market conditions are still detrimental to oil and gas companies, especially in the near future. He expects that with the increase in global crude oil inventories, oil prices are likely to continue to fall, and oil prices may drop to $20 per barrel in the next few weeks.

In this regard, Hitler expects that oil inventories will decline in the second half of the year, thereby significantly increasing oil prices. He said that although the large-scale shutdowns in the United States, Europe and other regions have led to a decline in oil demand, it should be noted that China's oil demand is rebounding.