The time for cardiac arrest has passed, OPEC+ introduced its supply cut. It was widely expected that the cartel would cut its production by nearly 10 million B/D, and they have delivered.
OPEC+ is done with its job–for now. We need two important factors to play their role, and they are as follows:
Non-OPEC+ members need to show a similar enthusiasm to address the oil supply.
The global lockdown triggered by Coronavirus needs to end.
For buyers, the opportunity to get involved in this trade was yesterday when the price dropped below $24 as it was pretty much given that the price would spike. Now, the questions for traders are is the increase enough, and what’s next for oil?
Demand is Still in Intensive Care Unit
The reason we are not going to see the oil price roar back to the pre-coronavirus level yet is that the demand shock is mammoth, and I have talked about this before. The current measure, supply cut, is enough to drain some of the supply, but it is the demand equation that is entirely out of whack. If you are wondering how much, let’s take a look at the US’s total oil consumption. The chart below shows that it is sitting at a thirty-year low. With the demand at such a low level, it is evident that we are not out of the woods yet.
The Silver Line
Interestingly, the massive plunge, as demonstrated in the above chart, occurred mainly due to the lockdown in the US, once the lockdown ends, a large portion of this demand is likely to recover. Therefore, the demand equation which right now looks battered may start to look better soon, and this means better oil price.
OPEC+ won’t be happy if the US doesn’t join with the oil production, which could result in the OPEC members failing to comply with the agreement, or the deal could fall apart completely.
Oil traders need to keep in mind that the US has been ramping up its production since the 2016 production cut by OPEC. The below chart shows the net change for OPEC, US, and OPEC+US oil production.
Clearly, the US has been the beneficiary of the recent (2016) supply glut. The oil production surged over 4.4 million B/D in the US while the OPEC cut its production by 5.7 million B/D. Overall, the oil production dropped by 1.5 million B/D since November 2016.
All eyes will be on the G-20 energy meeting now. Investors would like other oil-producing nations to pledge more oil cuts, and they need to be above the level that OPEC+ has committed. OPEC+ doesn’t welcome the natural oil production cut through CAPEX, and they have made this very clear. Nations such as the US need to step up their game, only that will address the issues caused by supply. Otherwise, one can say that the patient is out of the intensive care unit (ICU) but still in the hospital, which leaves the door open for the patient to end up in the ICU again.