Analys
OPEC+ reaches historic deal, but is it enough?
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Following an impasse that lasted from 6th March until Easter weekend, OPEC+ are finally ready to start cutting oil production again. The pain from falling demand and rising supply that led to Brent oil prices falling to an 18-year low was too much to bear for oil producing countries. However, to get the producers together was difficult after the rift emerged between Saudi Arabia and Russia that led to what we described as the Greek Tragedy on March 6th. That obstacle was overcome by President Trump (US) brokering a conversation between President Putin (Russia) and King Salman (Saudi Arabia). The US’s role in the deal did not end there. After Mexico disagreed with its allotted cut of 400,000 thousand barrels per day, the US stepped in to implicitly agree to cut for Mexico. This clearly highlights that the US is as desperate as the members of the cartel to see oversupply curtailed and oil prices higher.
The Mexican standoff
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The ‘Mexican standoff’ on Thursday 9th April led to large delays in the proceedings and by the time the G20 countries met on Friday 10th April, a deal was still not established. The G20 meeting, chaired by Saudi Arabia was an opportunity for consumer countries to express the extent of demand destruction they see and what they are doing to reduce supply (in countries that are large producers as well). However, the communique from this meeting was weak, with no firm numbers in terms of commitment. Apparently original drafts of the communique had much stronger wording, paraphrasing the European Central Banks’s Draghi’s “whatever it takes” language. However, the watered-down version available seems to be the product of a lack of agreement and distrust among members.
The deal
The OPEC+ deal as its stands is summarised as:
- Production cuts of 9.7mn barrels per day (mb/d) from May to June 2020 relative to October 2018 levels for most countries
- Reference point for Russia and Saudi Arabia is 11mb/d (which is higher than what they were producing in October 2018)
- Cuts taper to 7.7mb/d from July 2020 to December 2020 and then to 5.8mb/d Jan 2021 to April 2022
- Individual country quotas are not yet available on OPEC’s website
Is the deal sufficient?
That will be the largest ever coordinated cut in oil production. The key question is whether this will be enough to bring the oil market back in balance?
With demand destruction forecasts ranging from 15-22mb/d in April 2020 and these measures not even coming into place until May, we are likely to see a substantial overhang in the short-term. But the deal does last until 2022, so production restraint could mop up excess supply at the back end. Clearly nobody really knows the length and amplitude of the of the COVID 19 related demand destruction, but at least the second part of the twin shock on oil markets (the supply boost) is being addressed.
Extreme contango to stay
In the short-term we think that oil market extreme contango will persist. Although there is no reliable data on global storage capacity, the fact that tanker rates have risen by 116% in March 2020 indicates that land storage is running low and hence floating storage is in high demand. Also, the price of West Texan Intermediate at Cushing is at a US$6 premium to West Texan Intermediate in Magellan East Houston (31 March 2020), indicating that oil stored in-land is trading at a significant premium to that on the coast. Given that the deal doesn’t come into force until May and Saudi Arabia is selling oil to Asia at the deepest discount seen in decades, we think near-term oversupply and price weakness will keep the front end of the oil futures curve at a heavy discount to the back end of the curve.
Nitesh Shah, Director, Research, WisdomTree
DISCLAIMER
This material is prepared by WisdomTree and its affiliates and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date of production and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by WisdomTree, nor any affiliate, nor any of their officers, employees or agents. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of future performance.
Analys
Stronger inventory build than consensus, diesel demand notable
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Yesterday’s US DOE report revealed an increase of 4.6 million barrels in US crude oil inventories for the week ending February 14. This build was slightly higher than the API’s forecast of +3.3 million barrels and compared with a consensus estimate of +3.5 million barrels. As of this week, total US crude inventories stand at 432.5 million barrels – ish 3% below the five-year average for this time of year.
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In addition, gasoline inventories saw a slight decrease of 0.2 million barrels, now about 1% below the five-year average. Diesel inventories decreased by 2.1 million barrels, marking a 12% drop from the five-year average for this period.
Refinery utilization averaged 84.9% of operable capacity, a slight decrease from the previous week. Refinery inputs averaged 15.4 million barrels per day, down by 15 thousand barrels per day from the prior week. Gasoline production decreased to an average of 9.2 million barrels per day, while diesel production increased to 4.7 million barrels per day.
Total products supplied (implied demand) over the last four-week period averaged 20.4 million barrels per day, reflecting a 3.7% increase compared to the same period in 2024. Specifically, motor gasoline demand averaged 8.4 million barrels per day, up by 0.4% year-on-year, and diesel demand averaged 4.3 million barrels per day, showing a strong 14.2% increase compared to last year. Jet fuel demand also rose by 4.3% compared to the same period in 2024.
Analys
Higher on confidence OPEC+ won’t lift production. Taking little notice of Trump sledgehammer to global free trade
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Ticking higher on confidence that OPEC+ won’t lift production in April. Brent crude gained 0.8% yesterday with a close of USD 75.84/b. This morning it is gaining another 0.7% to USD 76.3/b. Signals the latest days that OPEC+ is considering a delay to its planned production increase in April and the following months is probably the most important reason. But we would be surprised if that wasn’t fully anticipated and discounted in the oil price already. News this morning that there are ”green shots” to be seen in the Chinese property market is macro-positive, but industrial metals are not moving. It is naturally to be concerned about the global economic outlook as Donald Trump takes a sledgehammer smashing away at the existing global ”free-trade structure” with signals of 25% tariffs on car imports to the US. The oil price takes little notice of this today though.
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Kazakhstan CPC crude flows possibly down 30% for months due to damaged CPC pumping station. The Brent price has been in steady decline since mid-January but seems to have found some support around the USD 74/b mark, the low point from Thursday last week. Technically it is inching above the 50dma today with 200dma above at USD 77.64/b. Oil flowing from Kazakhstan on the CPC line may be reduced by 30% until the Krapotkinskaya oil pumping station is repaired. That may take several months says Russia’s Novak. This probably helps to add support to Brent crude today.
The Brent crude 1mth contract with 50dma, 100dma, 200dma and RSI. Nothing on the horizon at the moment which makes us expect any imminent break above USD 80/b
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Analys
Brent looks to US production costs. Taking little notice of Trump-tariffs and Ukraine peace-dealing
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Brent crude hardly moved last week taking little notice of neither tariffs nor Ukraine peace-dealing. Brent crude traded up 0.1% last week to USD 74.74/b trading in a range of USD 74.06 – 77.29/b. Fluctuations through the week may have been driven by varying signals from the Putin-Trump peace negotiations over Ukraine. This morning Brent is up 0.4% to USD 75/b. Gain is possibly due to news that a Caspian pipeline pumping station has been hit by a drone with reduced CPC (Kazaksthan) oil flows as a result.
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Brent front-month contract rock solid around the USD 75/b mark. The Brent crude price level of around USD 75/b hardly moved an inch week on week. Fear that Trump-tariffs will hurt global economic growth and oil demand growth. No impact. Possibility that a peace deal over Ukraine will lead to increased exports of oil from Russia. No impact. On the latter. Russian oil production at 9 mb/band versus a more normal 10 mb/d and comparably lower exports is NOT due to sanctions by the EU and the US. Russia is part of OPEC+, and its production is aligned with Saudi Arabia at 9 mb/d and the agreement Russia has made with Saudi Arabia and OPEC+ under the Declaration of Cooperation (DoC). Though exports of Russian crude and products has been hampered a little by the new Biden-sanctions on 10 January, but that effect is probably fading by the day as oil flows have a tendency to seep through the sanction barriers over time. A sharp decline in time-spreads is probably a sign of that.
Longer-dated prices zoom in on US cost break-evens with 5yr WTI at USD 63/b and Brent at USD 68-b. Argus reported on Friday that a Kansas City Fed survey last month indicated an average of USD 62/b for average drilling and oil production in the US to be profitable. That is down from USD 64/b last year. In comparison the 5-year (60mth) WTI contract is trading at USD 62.8/b. Right at that level. The survey response also stated that an oil price of sub-USD 70/b won’t be enough over time for the US oil industry to make sufficient profits with decline capex over time with sub-USD 70/b prices. But for now, the WTI 5yr is trading at USD 62.8/b and the Brent crude 5-yr is trading at USD 67.7/b.
Volatility comes in waves. Brent crude 30dma annualized volatility.
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1 to 3 months’ time-spreads have fallen back sharply. Crude oil from Russia and Iran may be seeping through the 10 Jan Biden-sanctions.
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Brent crude 1M, 12M, 24M and Y2027 prices.
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ARA Jet 1M, 12M, 24M and Y2027 prices.
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ICE Gasoil 1M, 12M, 24M and Y2027 prices.
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Rotterdam Fuel oil 0.5% 1M, 12M, 24M and Y2027 prices.
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Rotterdam Fuel oil 3.5% 1M, 12M, 24M and Y2027 prices.
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