“Historic” OPEC+ Cuts Fall Flat

After significant bickering and drama last week, the OPEC+ group agreed on a historic production deal, cutting world output by 9.7 million barrels per day. But following a long holiday weekend, markets don’t seem too enthusiastic about the deal.

Who Made the Cuts?

As a reference, the OPEC+ group contains 10 members of OPEC as well as 10 non-OPEC countries. Saudi Arabia and Russia shouldered half of the cuts, with the other 18 members furnishing the rest. For most producers, the cuts amounted to a 23% production drop. Mexico, which hedges a significant portion of its production to maintain consistent prices, contributed notably less than the other parties, cutting output by just 100 kbpd.

How Did Markets React?

Despite what was in OPEC’s words an “Extraordinary” agreement, oil markets plunged on Friday by nearly 10%. Despite moderately higher prices this morning, oil markets are clearly showing that 10 MMbpd is insufficient to address massive demand destruction. With the US GDP expected to drop 25%-35% in the coming months and global GDP down at least 10% in Q2, oil demand is cratering. Gasoline demand is down roughly 50% currently, and despite solid diesel demand, the entire oil complex is feeling the pressure.

Who Didn’t Cut Production?

The OPEC+ agreement did not include any support from American producers, though market forces are expected to cause some 2-3 MMbpd drop in US shale production. Other countries including Canada, Brazil and Norway may bandwagon with the cuts, though they may wait for a period to not be associated with the OPEC+ group. OPEC has hinted at other producers contributing as much as 5 MMbpd to the cuts, including US market declines, targeted cuts, and increased purchases of Strategic Petroleum Reserves.

How Long Do Cuts Last?

This round of cuts extends through 2022, though the total size will decline over time. From now until June 2020, OPEC+ will cut 9.7 MMbpd. In the second half of 2020, cuts will be 7.7 MMbpd, though the group may deepen those cuts at its June 20, 2020 meeting if the market requires additional action. In 2021 and beyond, OPEC will cut production by 5.8 MMbpd. The group will meet in December 2021 to determine whether cuts should be extended further.

Today’s Market Trends

Markets are recovering after tumbling over the weekend. Crude oil is currently trading at $23.72, up 96 cents (4.2%) from the weekend’s rout.

Fuel prices are also moving higher, though both sustained heavy losses last week. Diesel is currently trading at $0.9948, up 2.2 cents (2.3%). Gasoline prices are $0.7114, up 3.4 cents (5.0%).