Desperate times call for desperate measures. Faced with an upended market, a savage rout in oil prices since early March, and egged on by US President Donald Trump, the OPEC+ group (primarily Saudi Arabia and Russia) met virtually on April 9 to discuss output cuts to support prices.
The group agreed to cut oil output by 10 million barrels a day (mbd) — about a tenth of the global oil consumption until recently (about 100 mbd). The 10 mbd cut will be applicable from May to June 2020; it will then be reduced to 8 mbd from July to December 2020, and then to 6 mbd until April 2022.
A cut of this scale is unprecedented, but even this may not be big enough. That’s because, over the past few weeks, global oil demand has been ravaged by the coronavirus pandemic. Lockdowns and shutdowns across vast swathes of the world have cut oil demand by an estimated 25-30 per cent — that would mean a demand squeeze of 25-30 mbd. The 10 mbd supply cut announced by the OPEC+ group, even if it plays to plan, pales in comparison.
The market, primed by Trump to expect a cut of 15 mbd or more, seemed underwhelmed, and oil prices fell back. Brent oil (spot price), which had rallied in the past few days on hopes of a mega output cut deal, lost about 4 per cent after the OPEC+ meeting, and now trades at about $26 a barrel.
It could go back to the 18-year low of about $20 seen a few days back, and even fall further.
The outlook for oil prices seems poor for a few reasons. One, demand for oil is extremely weak and uncertain, and will likely remain so until the coronavirus pandemic is under control. Extension of lockdowns in major oil-consuming markets such as India could mean more demand destruction. Even after the lockdowns are lifted, it could take quite some time before things get back to normal.
Denne historien er fra April 13, 2020-utgaven av The Hindu Business Line.
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Denne historien er fra April 13, 2020-utgaven av The Hindu Business Line.
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