April 13, 2020

Oil: Is This The End Of Tumultuous Period?

Oil: Is This The End Of Tumultuous Period?

A historic deal has been agreed to curtail oil supply among the oil-producing nations. This deal has put an end to the devastating oil war that brought the price of oil to its knees and many oil-producers to the brink of bankruptcy.

A Deal Is Forged

OPEC+ alliance finally agreed to cut oil production by 9.7 million barrels a day—a little shy of the 10 million barrels a day that was initially touted, after a week-long marathon of video conferences. The deal was almost dead in the water because the discussions had fallen apart last week, but Donald Trump intervened and helped to forge a deal. The president tweeted that hundreds of thousands of jobs will be saved in the U.S.  The Saudi oil minister said that he is more than happy with the deal and he is glad of the fact that OPEC+ is up and live.

A Stormy Period

Oil prices are up today–after falling to a two-decade low—on the back of this agreement. Both crude and Brent prices spiked nearly 8 percent at the open but remained shy of their Thursday levels. Basically, after the first few seconds, oil prices retraced and gave up most of its bulk gain. Remember, crude trading prices soared above the $28 mark before giving up all the gains and dropped below the $23 mark briefly on Thursday last week. At the time of writing this report, crude and Brent prices were up by over three percent.

In my previous discussion, it was mentioned that the best-case scenario for crude oil prices is to reach the $30 mark. A cut above 15 million barrels a day could push the prices near $35. However, the fact is that crude oil prices have struggled to reach $28, as the high of the day for crude is 24.74. The reason that we have not seen a massive spike in oil prices is that the actual oil production cut is not even 10 million barrels a day, meaning the demand shock still outweighs the supply.

Has The Accord Capped The Tumultuous Month of Trading?

There is no doubt that the contribution in terms of oil production from countries like Canada, Brazil and the U.S. is a positive sign, but most of that cut is on paper, and pretty much driven by oil prices, meaning they are not organic cuts where taps are squeezed deliberately.

Oil demand has been brutally damaged since the outbreak of Coronavirus and this was the minimum cut that the industry was expecting. The oil demand is paralyzed for now and it will take some time for recovery.

Given the fact that the oil prices still remain very  close to a two decade low, and the prospect of global lockdown—something that has choked demand—is likely to end soon, the oil prices are expected to continue their journey to the upside.

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