Reporter of the Economic Business: Cai Ding Reporter of the Economic Business Business: Lan Suying
Picture source: Photo Network
After the crude oil price war between Saudi Arabia and Russia lasted for nearly a month, the market finally waited for an epic crude oil production cut agreement.
In the early morning of April 13, Beijing time, the OPEC+ oil alliance announced that it had reached the largest production cut agreement in history. Specifically, the agreement includes a two-month first round of production cuts starting from May 1, 2020, with a production cut of 9.7 million barrels per day; a production cut of 7.7 million barrels per day from July 2020 to the end of the year; a production cut of 5.8 million barrels per day from January 2021 to April 2022.
After the above-mentioned production cut agreement was reached, international oil prices continued to rebound, US WTI oil prices rose by nearly 5%, and Brent crude oil rose by 4%. Domestic energy and chemical futures rose sharply at the opening. However, despite a historic production cut agreement, some market participants are concerned that the reduction will still not be enough to cope with the decline in global crude oil demand. Goldman Sachs and other international banks bluntly stated that although the OPEC+ production cut agreement is historic, the scale of production cuts is insufficient, and oil prices will fall further in the next few weeks.
The total crude oil production cut this year will exceed 20 million barrels per day
As one of the initiators of this round of oil price war, Saudi Arabia announced that it will cut production to 8.5 million barrels per day from May. Once Saudi Arabia's production cuts are in place, this will hit the country's lowest oil production level since 2011.
Russian Energy Minister Novak said that Russia will cut production by 2.5 million barrels per day in May and June, and the baseline for production reduction is 11 million barrels.
In addition, the United States, Brazilian and Canada will jointly reduce production by 3.7 million barrels per day, and the United States will also reduce production by 300,000 barrels per day for Mexico (Mexico 100,000 barrels per day).
At present, OPEC+ is waiting for more news of production cuts in G20 countries. OPEC+ said the draft statement expected global crude oil production cuts to take effect from May 1. On this basis, the total crude oil production cut in 2020 will exceed 20 million barrels per day.
Ed Morse, global commodities director at Citigroup, described OPEC+'s historic agreement as "unprecedented measures in unprecedented times" in a report to clients on Sunday. He also added that the United States played a key role in the mediation between Saudi Arabia and Russia in the unprecedented production cut discussions, urging them to negotiate on the new OPEC+ agreement.
However, although the scale of production cuts is unprecedented, some market participants are worried that the production cuts will still not be enough to cope with the decline in global crude oil demand.
The latest oil market forecast proposed by the International Energy Agency (IEA) in its March report shows that global oil demand is expected to decline in 2020 as the impact of the new coronavirus spreads around the world, travel and wider economic activity are restricted. As the current situation remains unclear, this has brought great uncertainty to the assessment of the global impact of the epidemic.
In the core basic forecast of IEA, China's oil consumption has shrunk significantly, coupled with severe interference from global tourism and trade, which will lead to a decline in global oil demand for the first time since 2009.
Statistics show that India, the world's third largest consumer of crude oil, has dropped by nearly 70% compared with last year, down about 3.1 million barrels per day. Bloomberg previously reported that due to the impact of the new crown epidemic, China's oil demand may decline. China's oil demand has dropped by about 3 million barrels per day, equivalent to 20% of total consumption.
Why is Mexico's attitude towards reducing production? hedging does a good job
" Daily Economic News " reporters noticed that the production cut agreement should have been reached at the G20 Group Energy Ministers' Meeting held last Friday (April 10) Beijing time, but it was postponed to the early morning of Monday because Mexico refused to cut production. So, what makes Mexico maintain such a tough attitude towards crude oil production cuts?
Bloomberg reported that Mexico has been buying Asian-style put options from a small number of investment banks and oil companies over the past 20 years, which is considered the largest and most closely guarded oil deal on Wall Street. This option contract gives Mexico the right to sell crude oil at a pre-appointed price.
Mexico's put options are like an insurance policy: even if oil prices continue to weaken or plummet further, Mexico will continue to make profits.
Image source: Bloomberg
In the past 20 years, every time a financial crisis occurs or oil prices plummet, the above hedging practices have saved Mexico from huge losses: during the 2008 financial crisis, the strategy made Mexico a profit of $5.1 billion; in 2015, it made a profit of $6.4 billion; in 2016, it made a profit of $2.7 billion. Mexico spends $1 billion a year to buy options.
Mexican Finance Minister Arturo Herrera said in an interview with TV station: "Insurance policy is not cheap. But for a period like this, this kind of insurance will not impact our fiscal budget." It is said that a basket of oil in Mexico's budget this year is $49 per barrel, which is about $60-65 per barrel. According to Bloomberg's calculations, if the low oil price continues until the end of November, the average price will be as low as $20 per barrel, and the hedging operation will make Mexico profit of $6 billion.
Industry: Non-marketized production cuts are not enough to support oil prices in the long run
OPEC+ production cut agreement, Goldman Sachs said in a report that although OPEC+ reached an agreement, voluntary production cuts are still "too little and too late", and it is impossible to avoid the situation of oil storage facilities being filled. In the future, low oil prices will force all oil-producing countries to continue to take action to rebalance the oil market.
Goldman Sachs said on the surface that compared with the output level claimed by OPEC+ in April, the 9.7 million barrels per day cut this time means that the output level in May will drop by 12.4 million barrels per day from April. But compared with the average in the first quarter of this year, the agreed production cuts mean that production will only drop by 7.2 million barrels per day.
However, it is worth noting that the agreed production reduction does not represent the actual production reduction. Judging from the past situation, the scale of production cuts in actual implementation will be reduced.
Goldman Sachs believes that assuming that OPEC core member states can fully implement the production cut agreement in May without discounts and fulfill the performance rate of other members is 50%, then OPEC+'s production is actually only 4.3 million barrels per day lower than in the first quarter of 2020. The bank believes that the scale of this production cut is far from being able to make up for the loss of demand caused by the new crown epidemic, and WTI oil prices are at risk of falling to $20 per barrel in the short term.
UBS expects that Brent and WTI oil prices will remain at $20 per barrel by the end of June, but as the epidemic subsides and the economy recovers, international oil prices will rebound to $40 per barrel or above in the second half of the year. At present, oil-producing countries are facing "oil fullness", and many commercial oil storage facilities are overwhelmed. The US government even plans to rent out strategic oil reserve space to oil companies. The plummeting oil price is certainly unfavorable to oil-producing countries, but it is a rare procurement opportunity for consumer countries.
Chris Midgely, global head of analysis at SP Global Platts, believes that in the short term, crude oil demand will drop by 15 million to 20 million barrels per day, and this production cut is not enough to offset its impact. In addition, the current production cut plan is not enough to provide sustainable and restorative support to oil prices unless OPEC further cuts production.
Some investors have expressed similar concerns, as the global economy has been temporarily shut down due to the COVID-19 pandemic, and demand for gasoline, diesel and jet fuel have also been affected, so production cuts in the coming weeks may not be enough to support higher crude oil prices. Some analysts even bluntly stated that the production cut agreement reached in the early hours of Monday was too small and too late, and that amid travel restrictions and shutdowns, global daily oil consumption is expected to fall by as much as 30 million barrels this month.
Jeffrey Harley, senior market analyst at Anda (Oanda) Asia Pacific region Halley said in an interview with the Daily Economic News: "The production cut agreement reached by OPEC+ is not surprising, because despite the large production cuts, it cannot bridge the current gap in the decline in global energy demand. What is even more disappointing is that the US, Norway, Canada and Brazil have zero promises to cut production. These countries have only vaguely expressed their willingness to cut production by millions of barrels over time under the influence of lower oil prices. OPEC+'s main production cuts will only last until June this year, when the total production cuts of OPEC+ begin to gradually decrease, which implies that OPEC+ is still hoping to save oil prices by V-shaped recovery."
" Coupled with the spread of the global COVID-19 pandemic, in general, I think this production cut agreement is not enough to really boost oil prices.The best outcome OPEC+ and the United States can expect is that the production cut agreement provides support for oil prices in the short term. We expect Brent crude oil to fall back to the range of $25 to $27 per barrel. "Jeffrey Harley added to the reporter.
Director of the China Energy Economics Research Center of Xiamen University Lin Boqiang added to the reporter of "Daily Economic News", "(OPEC+'s production cut agreement) will definitely support oil prices, but it will not support much, that is, production cuts will be beneficial to the further decline in oil prices. However, OPEC+'s production cuts are not enough, and the current gap is still large. I don’t expect OPEC+ to cut production further next, but to wait for the United States to cut production. The United States and Canada will passively reduce production due to the high cost of shale oil. "As for when global crude oil demand will rebound, Lin Boqiang said that at least it needs to wait until the epidemic in the United States improves.
Liu Qiang, chief analyst of the chemical industry of Pacific Securities, told the reporter of "Daily Economic News" that "OPEC+'s production cut agreement is definitely effective (the support for oil prices), but the main problem facing oil prices at present is the decline in global demand, so it ultimately depends on when global crude oil demand can rebound. This depends on when the global epidemic will improve, which is very difficult to judge. In addition, through a non-marketized production cut agreement such as OPEC+, (support for oil prices) will not last long. It is best to adjust backward and high-cost production capacity through market-oriented means, otherwise the increase in oil prices will be suppressed in the future. "
Dr. Amrita, Chief Petroleum Analyst at Energy Aspects, an independent research consulting firm Sen told the reporter of "Daily Economic News" that compared with the global crude oil demand they see, the OPEC+ cut this time is far from enough. Global energy demand may fall by 25 million barrels per day in April compared with the same period last year. Amrita Sen added that considering the global economy has been damaged by the epidemic, the recovery of crude oil demand will be very gradual, so these production cuts only provide short-term support for oil prices, but will not cause oil prices to rise.
In addition, BNP Paribas Asset Management believes that OPEC's production cut agreement will help support emerging market currencies, after the previous plummeting crude oil prices brought pressure to the central bank to cut interest rates during the epidemic. The bank is optimistic about the insurance-based trading of emerging market stocks, among which Asian assets will perform more clearly.
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