April 8, 2020

Special Report: Why There Is Retracement In Oil Price?

Special Report: Why There Is Retracement In Oil Price?

Oil prices have rallied since last Thursday on the back of hopes that there will be a supply cut from OPEC+. The cartel assured the markets on Friday that it will hold a meeting on Monday, but then it was pushed till Thursday and this has dampened the oil prices.

The Background

On the 2nd April, oil prices spiked on the hopes that a supply cut is coming. Donald Trump, the president of the United States said in his tweet that Russia and Saudi Arabia will cut oil production. On Friday, the WTI crude oil traded at a high of 29.13 on the back of hopes that on Monday, a supply cut will be announced. Over the weekend, the OPEC+ meeting was delayed till Thursday, and this was enough to take some air out of the oil rally. On Monday, the WTI crude price started to drop and on Tuesday, we experienced intense sell-off that pushed the price towards its low of 23.50 (today it is back above that level and trading above $25—at the time of writing this report). The price of WTI is still holding on to its partial gain and the OPEC+ virtual meeting is taking place tomorrow.

Easing off

The question which many investors are asking themselves is why have we seen such an intense sell-off especially if the OPEC+ cartel is still going to hold its supply cut meeting on Thursday? The answer is very simple, the OPEC officials have a history of changing their tune, and the oil price dances to it. The supply cut is still on the table, and for me, the minimum that we are going to get from the OPEC+ will be 10 million B/D. if there were no prospects of such a supply cut, then we should have seen the oil prices dropping like a rock and visiting the previous levels.

The Reason

Investors are wary that the US is going to join the production cut tomorrow, and this is what is haunting traders now. Remember, the initial actions of Donald Trump gave the markets perception that this time the US will join the production cut as well. So far, there is no clarity whether the US will cushion the burden, and whether it will scale back on its production. During the previous oil production cuts by OPEC+, the US didn’t join the cartel in their supply cut efforts. Investors are paying attention to this particular factor and wondering if the production cut is going to make any difference.

The Answer

The US is likely to be willing to cut oil production if the crude price remains below $35 or $30. This is because, for most of the US oil producers, the breakeven price is higher than $40. A 10 million barrels per day production cut isn’t enough for the price to move higher than $35. What we need here is a strong message, and that is “whatever it takes”. If the US joins the OPEC+ in the production cut, the message will be strong for the industry. Then even a small production cut, something along the lines of 10 M B/D could be sufficient to push the price higher. But without the US on board, a 15 million B/D production cut may not be sufficient to push the price higher than $40.  

The Opportunity

One thing is for certain, come Thursday we are going to get a production cut, and this means higher oil prices. I think that the price has pretty much bottomed out for now, and any pullback in the oil price remains an opportunity for investors to bag something cheap. But another follow up report will look into more details to answer the question whether we have reached the bottom.

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