Chinanews client Beijing, April 11 (Zhang Xu) At 22 o'clock on April 9, Beijing time, the highly anticipated OPEC + (OPEC +) meeting was held. Although OPEC + reached a record-breaking framework agreement for production reduction, the international The oil price plunged after the initial surge in the meeting. The market-desired production reduction agreement has finally arrived. Why don't oil prices rise instead of fall?
Brent crude oil futures price trend. Image source: Wind
The largest production reduction agreement in history is not as good as market expectations
After a 9-hour marathon negotiation, OPEC + emergency meeting finally announced the conclusion of a new draft production reduction agreement.
The draft agreement shows that from May 1, 2020, the first round of production reduction will be carried out for a period of two months, with a reduction of 10 million barrels / day; from July 2020, 8 million barrels / day will be reduced to December; from 2021 Reduce production by 6 million barrels per day from January to April 2022.
Regarding OPEC + some important member countries' production reduction share, the draft production reduction agreement also made a statement: Russia and Saudi Arabia will reduce production by 2.5 million barrels / day each from May to June; Iraq will reduce production by 1.06 million barrels / day from May to June; The UAE will cut production by 720,000 barrels / day from May to June; Kuwait will reduce production by 640,000 barrels / day from May to June; Kazakhstan and Nigeria will cut production by about 400,000 barrels / day from May to June.
Iran, Venezuela and Libya will be exempted from the output reduction resolution. In addition, OPEC + hopes that non-OPEC + oil-producing countries can reduce production by 5 million barrels per day.
10 million barrels per day, this is the largest production reduction agreement since OPEC was founded. But in the face of a record reduction agreement, oil prices have plunged. As of the close of April 9, WTI crude oil futures prices fell 9.29% to 22.76 US dollars / barrel; London Brent crude oil futures prices fell 4.14% to close at 31.48 US dollars / barrel.
Long Yan Information analyst Li Yan believes that this is caused by three reasons. First, at the beginning of the meeting, there was news that the OPEC + production reduction target was 20 million barrels per day. This news raised market expectations. Second, although OPEC + has reached a preliminary output reduction agreement of 10 million barrels per day, and OPEC will be responsible for 60%, the remaining part is still inconclusive. The market is worried that this scale of production reduction will not be enough to offset the burden of the epidemic on demand. The third is that among the newly-produced oil-producing countries, Mexico still has objections to the new version of the production reduction agreement and has not agreed.
Insufficient demand is the main reason for the continued slump in oil prices
The market generally believes that insufficient demand is the main reason for the lack of support for crude oil prices.
Affected by the epidemic, since March, the economies of many countries around the world have been affected, and the demand for oil has declined. Goldman Sachs predicts that global oil demand in the second quarter will decline sharply by 14 million barrels per day from the same period last year.
Therefore, Goldman Sachs believes that even if the OPEC + meeting reached a production cut of 10 million barrels per day, it is not enough to improve the oil market supply and demand balance. "Ultimately, the magnitude of the plunge in demand is too large for OPEC's coordinated production cuts."
The global crude oil demand declined due to the impact of the new coronary pneumonia epidemic. Source: International Energy Agency
Russian Energy Minister Novak also said that due to the decline in global economic activity, crude oil demand fell by 10-15 million barrels per day.
OPEC + documents show that global crude oil demand is expected to fall by 12 million barrels / day in the second quarter of 2020. Global crude oil demand is expected to shrink by 6.8 million barrels / day in 2020.
The sharp drop in demand has directly led to rising crude oil inventories. A report released by the US Energy Information Administration (EIA) on the 7th shows that as of the week of April 3, US EIA crude oil inventories increased to 15.177 million barrels per day, much higher than the previous forecast of 9.699 million barrels.
At present, the global oil supply exceeds 25 million to 30 million barrels a day, and the price of crude oil under supply and demand is slashing. The price is hovering around 20-25 dollars.
The US Energy Information Administration (EIA) predicted in its short-term energy outlook report that the average price of WTI crude oil in 2020 is US $ 29.34 / barrel, and the average price of Brent crude oil is US $ 33.04 / barrel, both of which are down about 48% from 2019 .
Price forecasts made by the US Energy Agency. The picture comes from the US Energy Agency.
Mexico opposes, uncertainty remains on production cuts
It is worth noting that due to opposition from Mexico and the unclear scale of U.S. production cuts, there is still uncertainty about the implementation of the scale.
Mexico has proven crude oil reserves of 6.6 billion barrels, ranking 18th in the world, and its crude oil production scale continued to decline after peaking at 3.83 million barrels / day in 2004. At present, the country's crude oil production is only 1.78 million barrels per day, less than half of the peak level, especially in the case of increasing downward pressure on the national economy, Mexico has always hoped to promote the country's oil industry to boost the economy.
According to the draft production reduction agreement, Mexico needs to reduce production to 1.353 million barrels per day, which is contrary to the country's goal of boosting its own oil industry. Due to its disagreement with the production cut plan, Mexico withdrew from the OPEC + meeting midway.
Mexican Energy Minister Rocio Nahle Garcia said on social media that OPEC requires Mexico to reduce its daily output by 400,000 barrels, while Mexico is only willing to reduce its oil production by 100,000 barrels / day in the next two months. It decreased from 1.781 million barrels / day in March to 1.681 million barrels / day.
Data map: The gas station staff is refueling the vehicle. Zhang Yunshe
OPEC issued a statement on the website saying that OPEC + would reach an agreement to reduce production by 10 million barrels per day from May 1, on condition that Mexico's consent be obtained.
Saudi Arabia's Energy Minister Abdul-Aziz said on the 10th that OPEC + 's final agreement to reduce production by 10 million barrels per day "relies on" the participation of Mexico.
The focus of the market is now turning to the G20 Energy Ministers ’Meeting on Friday. If major oil-producing countries, including the United States and Canada, also join the ranks of production cuts, it may be able to add strength to reviving oil prices. OPEC + representatives said that OPEC + hopes to reduce G20 production by up to 5 million barrels per day, but even if G20 does not join this rank, they will still reduce production.
In addition to opposition from Mexico, the draft reduction agreement also faces some other uncertainties. OPEC + hopes that countries including the United States, Canada, and Brazil can provide support for further production cuts.
At present, Canada has responded to this, but there are foreign media reports that US President Trump is reluctant to participate in the production reduction of domestic companies, because the US crude oil production has declined significantly because of shale oil company bankruptcy and cut spending. At the same time, the US antitrust laws also do not allow companies to boost oil prices through measures such as production cuts.
Russia insists that the United States cannot rely solely on market forces to drive its record decline in oil production.
Jin Zhengchuang analyst Han Zhengji believes, "Although US Secretary of Energy Bruyette expects US oil producers to also reduce production, the US has not proposed a production cut agreement because the US government does not have a mechanism to control crude oil production, which may become a production cut. An uncertain factor in the plan. "(End)