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5 Things to Know About the OPEC+ Production Cut Extension
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The world’s major oil producers have extended the record output curbs through to the end of July, in an attempt to tackle a global supply glut and keep prices afloat.
What Did the OPEC+ Decide?
Member countries of the OPEC+ group - a coalition between OPEC countries under kingpin Saudi Arabia and non-members led by Russia - decided via a video conference on Saturday to carry on with their historic cuts in oil output for another month as they battle a global glut of crude due to coronavirus-induced demand destruction.
The alliance, looking to shore up prices, started to withhold output by almost 10 million barrels per day – the largest in history – from May 1. Per the original plan, the initial reduction would have lasted for two months. Beginning July, the production cap would have been relaxed to 8 million barrels per day through the remainder of this year.
However, Riyadh and Moscow agreed to keep the current level of cuts until the end of July. The producer group decided against tapering the existing curbs, which has lifted a barrel of crude from the depths of subzero prices to around $40 now.
What is the Group’s Aim?
In April, WTI crude futures fell to an all-time low and even went negative for a while as the coronavirus outbreak engineered an unprecedented slump in demand amid ramped up production.
The OPEC+ group’s deal aims to support oil prices by progressively lowering the massive surplus of global crude products by limiting the commodity’s production. To achieve the target, the alliance wants tighter adherence with quotas from some cartel members. Records show that in May and June, countries such as Nigeria and Iraq under complied with earlier announced production cuts, which the group wants to be compensated in July.
The broader objective of the countries taking part in the agreement is to regain their lost ground in the market and to sustain oil prices. Through the reduction of petroleum product supplies, crude prices are likely to become more receptive to the balance between consumption and the flow of production.
Is the OPEC+ Decision Commensurate to the Goal?
Considering the massive surplus, even taking off 10 million barrels per day of oil from the market since May might not be sufficient to balance supply and demand.
As a proof of the demand destruction, the Paris-based IEA projects global crude consumption to fall by a record 8.6 million barrels per day to 91.2 million barrels per day in 2020. The EIA, on its part, has forecast that world oil demand will fall by 8.1 million barrels per day this year on coronavirus.
Global inventories have swelled and product demand remains depressed. In particular, usage of distillates such as aviation fuel continues to be weak with air travel remaining seriously curtailed. Gasoline consumption has been hit hard too with millions of people staying at home, leading to far fewer road traffic.
While the market is no longer as oversupplied as feared, the OPEC+ group’s efforts to rebalance the market may take well into the fourth quarter to fully materialize.
What are the Risks to OPEC+ Strategy?
OPEC’s strategy to revive oil markets is dependent on all-round production restraint. The primary risk to this comes from the U.S. shale patch whose constituents are quick to pick up drilling activities on any steep rises in the price.
Recent U.S. government data has been supportive in terms of domestic producers scaling back operations. Weekly figures show output has dropped to 11.2 million barrels per day, since reaching 13.1 million in the second week of March. Volumes from United States’ number one basin, Permian, is set to fall by 87,000 bbl/d month over month to 4.3 MMbbl/d in June – the second month of decline, as the likes of Diamondback Energy (FANG - Free Report) , Cimarex Energy , Concho Resources , Pioneer Natural Resources (PXD - Free Report) and others invest a lot less money into the unconventional play in 2020.
However, crude’s rise from the bottom could encourage the shale patch to ramp up or resume drilling activities. In fact, the sharp gains in the price have already prompted EOG Resources (EOG - Free Report) and Parsley Energy – carrying a Zacks Rank #3 (Hold) - to plan for potential revival of production. This will offset the OPEC+ output curbs and weigh on the outlook for prices.
Meanwhile, non-compliance from some producers with the agreed output cuts could affect the OPEC+ group’s intentions of having a meaningful impact on oil prices.
Where Are Oil Prices Headed?
While the move was largely as expected, the extension of the current cuts most likely managed to put a floor under prices. However, there is still a long way to go before the OPEC+ group achieves the price and inventory levels it prefers.
Agreed, the cuts have been instrumental in pushing oil back around $40 a barrel, boosting producer finances, majority of which depend heavily on energy revenues. At the same time, the price rise has the potential to catalyze U.S. shale sector that is not covered by the output deal. This could slow the market’s rebalancing amid sharply increased global crude inventories.
5 Stocks Set to Double
Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.
Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.
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5 Things to Know About the OPEC+ Production Cut Extension
The world’s major oil producers have extended the record output curbs through to the end of July, in an attempt to tackle a global supply glut and keep prices afloat.
What Did the OPEC+ Decide?
Member countries of the OPEC+ group - a coalition between OPEC countries under kingpin Saudi Arabia and non-members led by Russia - decided via a video conference on Saturday to carry on with their historic cuts in oil output for another month as they battle a global glut of crude due to coronavirus-induced demand destruction.
The alliance, looking to shore up prices, started to withhold output by almost 10 million barrels per day – the largest in history – from May 1. Per the original plan, the initial reduction would have lasted for two months. Beginning July, the production cap would have been relaxed to 8 million barrels per day through the remainder of this year.
However, Riyadh and Moscow agreed to keep the current level of cuts until the end of July. The producer group decided against tapering the existing curbs, which has lifted a barrel of crude from the depths of subzero prices to around $40 now.
What is the Group’s Aim?
In April, WTI crude futures fell to an all-time low and even went negative for a while as the coronavirus outbreak engineered an unprecedented slump in demand amid ramped up production.
The OPEC+ group’s deal aims to support oil prices by progressively lowering the massive surplus of global crude products by limiting the commodity’s production. To achieve the target, the alliance wants tighter adherence with quotas from some cartel members. Records show that in May and June, countries such as Nigeria and Iraq under complied with earlier announced production cuts, which the group wants to be compensated in July.
The broader objective of the countries taking part in the agreement is to regain their lost ground in the market and to sustain oil prices. Through the reduction of petroleum product supplies, crude prices are likely to become more receptive to the balance between consumption and the flow of production.
Is the OPEC+ Decision Commensurate to the Goal?
Considering the massive surplus, even taking off 10 million barrels per day of oil from the market since May might not be sufficient to balance supply and demand.
As a proof of the demand destruction, the Paris-based IEA projects global crude consumption to fall by a record 8.6 million barrels per day to 91.2 million barrels per day in 2020. The EIA, on its part, has forecast that world oil demand will fall by 8.1 million barrels per day this year on coronavirus.
Global inventories have swelled and product demand remains depressed. In particular, usage of distillates such as aviation fuel continues to be weak with air travel remaining seriously curtailed. Gasoline consumption has been hit hard too with millions of people staying at home, leading to far fewer road traffic.
While the market is no longer as oversupplied as feared, the OPEC+ group’s efforts to rebalance the market may take well into the fourth quarter to fully materialize.
What are the Risks to OPEC+ Strategy?
OPEC’s strategy to revive oil markets is dependent on all-round production restraint. The primary risk to this comes from the U.S. shale patch whose constituents are quick to pick up drilling activities on any steep rises in the price.
Recent U.S. government data has been supportive in terms of domestic producers scaling back operations. Weekly figures show output has dropped to 11.2 million barrels per day, since reaching 13.1 million in the second week of March. Volumes from United States’ number one basin, Permian, is set to fall by 87,000 bbl/d month over month to 4.3 MMbbl/d in June – the second month of decline, as the likes of Diamondback Energy (FANG - Free Report) , Cimarex Energy , Concho Resources , Pioneer Natural Resources (PXD - Free Report) and others invest a lot less money into the unconventional play in 2020.
However, crude’s rise from the bottom could encourage the shale patch to ramp up or resume drilling activities. In fact, the sharp gains in the price have already prompted EOG Resources (EOG - Free Report) and Parsley Energy – carrying a Zacks Rank #3 (Hold) - to plan for potential revival of production. This will offset the OPEC+ output curbs and weigh on the outlook for prices.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Meanwhile, non-compliance from some producers with the agreed output cuts could affect the OPEC+ group’s intentions of having a meaningful impact on oil prices.
Where Are Oil Prices Headed?
While the move was largely as expected, the extension of the current cuts most likely managed to put a floor under prices. However, there is still a long way to go before the OPEC+ group achieves the price and inventory levels it prefers.
Agreed, the cuts have been instrumental in pushing oil back around $40 a barrel, boosting producer finances, majority of which depend heavily on energy revenues. At the same time, the price rise has the potential to catalyze U.S. shale sector that is not covered by the output deal. This could slow the market’s rebalancing amid sharply increased global crude inventories.
5 Stocks Set to Double
Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.
Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.
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