Cut or not? Oil surges ahead of Opec+ meeting

Dubai - Investors hope that Opec+ will agree to 8 to 10 million barrels per day production cut over the next 90 days.

Oil prices jumped on Thursday morning as all eyes were on the virtual meeting of Opec+ to discuss production cuts.

WTI crude gained 5.7 per cent to $26.53 while Brent rose three per cent to $33.84 as there are mixed signals whether the oil producers will reach agreement or not.

Investors hope that Opec+ will agree to 8 to 10 million barrels per day production cut over the next 90 days. It is also expected that US shale producers will also join the output reduction as part of agreement as Russia demands that the US should also join the meeting and cut shale oil production.  

The Opec+ deal on production limits ran until the end of March and now all producers are free to supply as much crude as they want. Saudi Arabia and other producers have increased production in April and also reduced prices.

Cut or no cut?

Edward Bell, commodity analyst at Emirates NBD, has assigned a low probability that a deal to cut production can be reached, leave aside how much may actually need to be cut.

"At its last meeting Opec+ failed to endorse even extending the production cuts that were in place for Q1 for the rest of the year. This time the level of cuts would be much more painful for producer economies to bear and there is no guarantee prices would move much higher than their current $25-35/b range given how weak demand is as a result of coronavirus-related shutdowns of major economies," Bell said.

He said primary rationale for not expecting a significant breakthrough is that the positions of the main actors, notably Saudi Arabia and Russia, have not changed.

"Saudi Arabia remains unwilling to single-handedly balance markets by taking the heaviest burden of cuts and will only agree to cut output if others do so as well. The Kingdom has so far showed no sign of moving away from its higher production levels. For its part, Russia continues to insist that the US participates in any production cuts. Moreover, rhetoric between Russia and Saudi Arabia has degenerated over the last few days into who was responsible for the failure of the March meeting," Bell said.

Naeem Aslam, Chief Market Analyst, at London-based AVA Trade, said it was clear by Thursday morning that the Trump administration is not attending this virtual meeting and this means that Opec+ is going to pressure the US to shoulder the burden of a production cut.

"So far, the US has said that a natural reduction in oil production is already taking place because of lower oil prices and we have seen companies like BP, Exxon Mobile cutting their Capex spending, but this will take much longer time. Opec+ wants the US to reduce the supply directly, after all, they are producing more oil than the Saudis," he said.

waheedabbas@khaleejtimes.com