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3 things to watch out for at the emergency OPEC+ and G20 meetings

9 Apr 2020
Last week, we suggested that oil was due a technical rebound and we might see concerted pressure by the US to stabilise the market. Since then, President Trump sparked a record rally after suggesting that Saudi Arabia and Russia would agree to remove 10m-15m barrels a day (b/d) of oil supply. The two countries are now due to meet Thursday, after OPEC’s initial meeting with Russia scheduled for Monday this week was postponed. We focus on three key areas to look out for, with the meeting potentially having a big impact on not just oil markets, but equities as well.

1. Saudi Arabia and Russia agreement?

A war of words between Riyadh and Moscow has deepened in recent days, with both accusing each other of causing a price war to hurt the US oil sector. Recall that Saudi Arabia moved to flood the market last month after Russia refused to make further cuts to production, before the extent of the lockdown measures was fully understood. WTI prices still remain down by more than half since January, even with the record weekly advance last week, as the global pandemic has crushed demand for oil by more than a quarter.

Currently, one idea is for OPEC+ to implement production cuts for at least three months from May to July, while other reports point to an OPEC cut of 10m b/d a day until the end of the year. However, both producers have signalled that the massive cut touted by President Trump should involve the US as well.

In reality, the issue may be too big for the Saudis and Russians to solve alone. Even if they cut 10m b/d a day, which equates to roughly 10% of global demand before the crisis, the market would still be oversupplied, resulting in prices turning lower once more.

2. US involvement – ‘whatever I have to do’

The current low-price environment is too low for US producers and this is highlighted by President Trump’s concern as well as the huge slowdown in drilling activity seen over the past few weeks. The big question is if Russia especially, will accept a cut like this from the US which will inevitably feed through into the market only gradually, in place of an authorised cut.

With the prospect of mass job lay-offs and production shut-ins, once again President Trump’s next moves will be crucial. He has hinted that he may impose tariffs on oil imports and that military aid to Saudi Arabia could be on the line, which begs the question as to whether he is employing his usual combative tactics in negotiations to achieve some kind of ‘win’.

3. Can the G20 help out?

Saudi Arabia, as holder of the rotating presidency of the G20, has also convened a meeting with those countries for Friday. It is hoped the large oil producers in this group – including the US, Canada, Norway and Brazil – might assist in tackling the supply glut that is at least 25m b/d. Of course, many G20 members don’t produce much oil or are more reliant on imports and have little incentive for price rises as recession looms.

One possible avenue of stabilising the market would be for those consumers without their own domestic production to consider buying surplus oil to fill strategic stocks, which India and China have announced they will start doing in the near future.

Oil markets are clearly questioning whether OPEC+ cuts of 10m b/d will be sufficient to offset the demand collapse which is currently estimated to be in excess of 20m b/d by some forecasters. The May-June WTI spread is trading at a massive $5 discount, highlighting the pressure on the front end of the curve and stress on current physical storage capacity. All the pressure is on the major players to formulate a swift response to stop the industry becoming overwhelmed by supply and prices falling further to cause production shut-ins.

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