Market Overview

5 March 2020

OPEC and Allies Still Find It Difficult to Agree as the Demand Rumours Reign in the Market

Oil prices remain under constant pressure despite new data released by the US energy department on Wednesday. Statistics showed a decrease of distillate stock for the seventh week in a row with distillate and gasoline volumes available in the US storages declining by more than four million barrels over the last week. The number of barrels of commercial crude oil stored by the US companies increased by 785,000 barrels only for the last week and by 1.65 million over the last three weeks.


Crude oil inventories even decreased by about one million barrels since the beginning of this year and it is fair to say that despite all threats of slowing global demand due to the coronavirus there is no evidence of overstocking on the oil market. However, worries continue to drive commodity markets despite a solid recovery in the prices of shares.


Controversially reports from different sources about the suspected decline of oil demand in China, in fact, have ejected oil traders into a kind of new virtual reality. Market players do not really care too much about the possibilities of additional restrains to production, instead they're guessing that fluctuations in demand could be in the cards.


Most of the OPEC countries failed to call an emergency meeting in mid-February as the OPEC Joint Technical Committee's (JTC) proposal of further production cuts by 600,000 bpd ran into opposition by Russian representatives that have rejected to provide any clear guarantees that Russia would support such a move. Russians are advocating that a further monitoring of market developments is needed, so any decision on additional production cuts should be postponed. Reuters and TASS news agencies sources on Wednesday evening said that there is no particular agreement within JTC and that the Russian energy minister Mr Novak left the Committee meeting even before it was over.


Oil prices slipped yesterday on the release of this news by just over one Dollar and by about the same amount on Thursday, reaching the area of $51 per barrel on the North Sea Brent benchmark. This indicates continuous pressure on oil prices, so they may have another chance to fall below $50 if OPEC does not make a decision. However, it is still possible that the market reaction on any OPEC move could remain limited.


Saudi Arabia and several other Gulf countries are pushing to cut production quotas by one million bpd or even 1.5 million bpd, in order to avoid further decline in prices. On the other hand, Russia 's position can also be well understood as there are doubts that demand will fall so catastrophically and they don't want to cede OPEC's market share to other oil producers from the United States or Brazil that refuse to make any coordinated moves with OPEC. In addition, a sharp reduction in quotas could demonstrate to the market that OPEC is on edge because of a lack in demand or that OPEC predicts such a strong deficit. That may ruffle the market's feathers: for example, the similar mixed reaction was seen after the urgent rate cut by the US Federal Reserve (Fed). So, maybe it would be better for exporters just to keep the "poker face" and wait until the market will regulate the prices by itself and the balance will be reached? But OPEC decided to go the other way by cutting the production by 1.5 million bpb in the second quarter of 2020, one million of which represents the cuts by OPEC itself and 500,000 for the rest of the OPEC+ members. Russia was rumoured to discuss the extension of existing production cuts with OPEC+ only.


Saudi Arabia could take the main part in the discussed cuts by reducing production by 400,000 or by 500,000 bpd unilaterally as this was the action the country took in the beginning of 2020. Russia may finally decide not to derail relations with the alliance and support OPEC's decision by making step-by-step cuts. This is more acceptable for the country while it has technological limitations for any reductions that could be implemented in two-three months period, unlike the Gulf countries which have an ability to cut production and to recover quickly.


The final response by the cartel will probably be clear on Friday, when OPEC+ will have a meeting where Russia and other non-OPEC countries will be able to voice their positions. But in short, whatever decision OPEC and its allies make in order to regulate the market, the supply side will no longer have a direct impact. OPEC restrictions on production, of course, provide some long-term support to the markets and even may return prices to the range above $60 per barre, but in the short run only demand expectations are determining the market and any information from the demand side will stir the wheel.


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