Oil - what do we know about OPEC+ meeting?

In this short summary we would like to present what is known about the upcoming OPEC+ meeting. We also provide a short commentary on where Thursday's talks could lead us.

• Announcement of the OPEC+ meeting triggered a 30-40% price surge on the oil market

• Saudi Arabia probably wants to strike an output cut agreement but wants Russia to be on board as well. Kuwait and United Arab Emirates back Saudi Arabia

• Meeting was initially planned for today (Monday, April 6) but has been postponed to Thursday, April 9

• Donald Trump called for slashing daily oil output by 10-15 millions barrels. However, current data from refineries shows that demand destruction may have reached 17 mbpd

• Some estimates point to demand dropping by as much as 30 mbpd by mid-year

• Saudi Aramco decided to delay announcement of monthly prices due to OPEC+ meeting. Announcement was expected on April 4. Buyers of oil expected major discounts to be announced as Saudi Arabia kept ramping up production. Next announcement will come on May 10

• Trump said that in case no agreement is reached, he may impose tariffs on Saudi crude. Other producers have not been mentioned so far. United States import around 3-4 million barrels of oil per day but most of it comes from Canada

• Saudi Arabia and Russia may want Canada and the United States to take part in output cuts

• There is no point for Canada to cut production as the United States are the only big purchaser of the Canadian oil. United States does not want to import less Canadian oil as it is cheap and US refineries are adjusted to process Canadian crude

• US shale producers will start limiting output amid current prices. However, forced cuts may be hard enforce

• Apart from the big oil companies, around 9,000 smaller, independent producers operate in the United States. Law protects those producers against price or output collusion

• United States may encourage Russia to take part in cuts by offering to lift some sanctions

• However, one should also pay attention to political interests and those may advise Russia to stick with OPEC rather than the United States. Trump's position ahead of elections has been greatly undermined recently. OPEC+ may want push US shale producers out of the market and balance it this way but it will take longer

• The United States has been invited to an upcoming OPEC+ video meeting. Earlier, the group invited United States to regular meeting scheduled for June

• Russia said that postponement of the video meeting was due to technical issues. It was also reported that Putin does not plan to meet with domestic oil executives

• It is rumoured that new agreement does not need to specify size of US cuts as shale producers will limit output due to low prices

Output cuts delivered by OPEC+ countries but without assistance of other producers can be seen as the worst case scenario. Why? Such an outcome would send a message to the markets that other producers are unwilling to cut and, given current demand destruction, may trigger price declines. Moreover, any cut smaller than 10-15 mbpd will be seen as a failure after Trump hinted on these numbers. Such an outcome could see prices remain at their current levels. Last but not least, prolonged negotiations may allude that an agreement will be reached and trigger a moderate rebound.

One should also keep in mind that agreed-on output cuts does not mean that output will fall by that much. Point of reference is important. Should producers decide to cut output by 10 million barrels per day, OPEC+ may use the same reference point as it did with the previous agreement. Moreover, declines in output in Venezuela or Iranu triggered by US sanctions may also be accounted as part of the output cut. Summing up, in such a scenario, an agreed-on output cut of 10 million barrels per day could amount to just 5-6 million barrels per day of real reduction.

Oil prices remain relatively elevated. Nevertheless, there is much room for a disappointment when it comes to the OPEC+ agreement. Prices may jump once an agreement is reached but whether it lasts will depend on the content of the agreement. Should it last, the resistance zone at $35 could be the first one to watch for bulls. Source: xStation5