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OPEC: too little, too late

OPEC: too little, too late

Information is not investment advice

Oil not happy

Yesterday, almost entire day market observers spent waiting for the OPEC+ virtual meeting results. The remote session started at 15:00 MT time and lasted for approximately eight hours. At the end? The oil price plunged to $23.

WTI_OilH4.png

Not that bad

Were the results that bad? Actually, not. The declaration of cooperation statement after the meeting states the following: at the first stage, there will be a 10mln-bpd cut in the total oil supply during May 1 – June 30; the next stage - the cut will be reduced to 8mln until December 31; and finally, until April 30 next year, it will be narrowed to 6mln. So we have a 10-to-6mln bpd three-step cut reduction during the next 12 months. Not that bad, taking into account the extent of discord Russia and Saudi Arabia were in just a month ago. Why then the market was so disappointed?

But still bad

Many observers say that the agreed move is simply not adequate to the situation in the oil market. This big a supply cut could have had its effect possibly a month ago. Now, it’s just too late, the damage is much more than that, and 10mln bpd cut is not enough. Strictly speaking, this figure is at the lower range of the cut amount figure that can possibly have any potential to rectify the market somehow. Donald Trump in one of his recent press conferences was speaking about 10 to 15mln bpd or “maybe more”. Well, as of now, it appears that it’s definitely not more. It makes sense to doubt the figure: global demand has contracted much more than 10% (exactly 10mln per day) compared to the pre-virus levels. Therefore, as hard as this deal was to reach, it is hardly capable to make the demand and supply meet in the current circumstances.

Mexico… Que pasa?

Mexico seems to have contributed a lot to the puzzling situation OPEC+ is in with this deal. The Mexican representative, Rocio Nahle, abruptly left the conference after hours of hard talks leaving OPEC without her consent on the conditions of the deal. The reason for that was not clarified as she never returned to the negotiations. The media immediately reacted to that with an utterly surprised (to say the least) tone at her actions. So at the end, Mexico did not agree on anything, and the document of the OPEC leaves the deal subject to Mexican approval. How, when and whether it will be obtained – it is not clear. Probably that’s why a lot of OPEC members expressed their commitment to proceed with the deal even without Mexico.

Aftermath

G20 talks will be resuming this Friday. The oil market situation will definitely be one of the focus points. Hopefully, there will be a positive outcome. One more day of waiting is nothing compared to the unmeasurable horizon of turbulence looming at the market if the steps are not taken.

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