April 3, 2020

SPECIAL REPORT: OPEC+ To Meet

SPECIAL REPORT: OPEC+ To Meet

Equity futures are trading lower because investors are concerned as the number of infected cases exceeds 1 million. No doubt the world is going to look different, this lethal virus has consumed over 53,000 lives in only four months.

The global economy is likely to shrink more than 2% during the first half of 2020 due to the public health crisis. The US, the biggest economy in the world, has the most cases, more than 245K people are infected, according to John Hopkins University. The number of unemployed exceeded 6 million yesterday, and the jobless rate could likely reach more than 31% in the coming months.

The oil market experienced wild swings yesterday, and the coming week should look similar. OPEC has called in an emergency meeting next week, and a virtual meeting will take place among OPEC+ members on Monday.

Yesterday, Donald Trump jolted the market in the late afternoon (European trading session) when he ramped up expectations about the oil supply cut. With just one tweet, he pushed the oil prices up as much as 21%. He conjured up the chance of a global alliance to rescue the oil industry, which has been hit hard.

Death Angles

WTI crude at $20 was undoubtedly sending death angles for the US shale industry as the market price fell far below their breakeven point. Very few, if any, US shale oil producers can survive and remain healthy if the price of WTI is at $30. During recent weeks, we’ve seen several companies apply for bankruptcy because it was impossible to survive.

If the default rate starts to gain serious momentum which a highly likely scenario, then the recovery from this disaster becomes chief damage, this kind of injury cannot be repaired overnight, it becomes more of a structural issue. The jobs lost under those circumstances take a lot of time to recover.

Positive Sign

It is certainly a positive sign that Donald Trump has stepped into the space. Without his intervention, the industry would have continued to suffer. What we need right now are higher oil prices for the US shale oil industry to survive. The OPEC+ meeting is scheduled and hopes are high.

Coalition- A Powerful Idea

The emerging idea is a global coalition—meaning all oil producers coming together and taking collective action to reduce the oil supply. This means OPEC, Russia, and the US deciding together on oil production—the supply.

On the one hand, this is certainly required, the US has ramped up production in the past years at the expense of others. The previous oil supply cut by the OPEC+ has benefited the US shale oil industry, and it has produced less dividend or the desired results for the overall oil industry. On the other hand, getting all parties to agree on something isn’t that easy.

If Trump can bring everyone under one roof and get them to agree on the supply cut, that would be huge. Remember, Saudi Arabia remains in the driving seat because of its ability to pump more oil, their breakeven is much lower. Still, all major oil producers deciding collectively on a price is a positive sign.

Is It Really A Supply Issue?

There is always a question whether the current stampede in the oil prices is due to the supply, or if it is something else, such as insufficient demand.

The whole world is in lockdown; economic activities are not even close to their normal levels which clearly explains that the issue is mainly with the demand.

The demand has been hit hard, and until we see economic activity return to normal levels and global growth back in the expansion territory, we are likely to experience a major recession. It is arduous to imagine a scenario under which oil prices jump back above the $40 mark.

Expectations

As per Trump’s tweet, the expectations have been set for ten million barrels or more per day. To put numbers in perspective, this means pretty much whole of the US production, or reducing Saudi’s oil production by ten million and leaving the remaining two million.

Of course, it is not one country that takes the hit, everyone shares the burden. Still, I think it is difficult for the OPEC+ to agree on this number. The number tweeted by Donald Trump is good enough to drive the algorithms crazy, but whether it can become a reality is a different question.

How Much of a Jump in Oil Price?

The question is, if we get this ten million barrel per day production cut, how much can the oil price rise? In my opinion, it is difficult for the WTI crude price to top the $35 mark, even if we get the desired production cut. The likely jump in the WTI crude oil will be between $30 to $35. The major issue here is with demand, reducing supply will certainly help, but it will not be enough to push the price back above $40.

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