Historic Production Cut Announced But Has the Oil Price War Really Ended?

Different oil-producing countries and OPEC have made a historic agreement to cut production by almost 9.7 million barrels a day.

According to the reports, it is the single ever biggest output cut in history as the countries agreed to cut their output in order to support the oil prices from falling down further.

The oil prices were hugely impacted since the beginning of the year due to the COVID-19 pandemic that has weakened the demand as countries around the world have put their populations under lockdown.

After the agreement yesterday, oil prices started surging during the early trade on Monday. Although, we’re still not sure that this won’t be enough to prevent the oversupply with the coronavirus pandemic hammering demand all around.

The US benchmark WTI went up by 7.7 percent to touch a high of $24.52 a barrel in early Asian trade while Brent was up 5.0 percent at $33.08 in the intraday.

At the time of filing this report, Crude oil was trading at $23.08, up by 1.37% and Brent was up by 0.76% at $31.72.

In the compromise reached on Sunday, the parties agreed to a cut of 9.7 million barrels per day from May, according to Mexican Energy Minister Rocio Nahle, down slightly from 10 million barrels a day envisioned earlier.

OPEC Secretary-General Mohammad Barkindo called the cuts “historic”.

The agreement between the OPEC and partners foresees deep output cuts in May and June followed by a gradual reduction in cuts until April 2022.

Has the Oil Price War really ended?

International crude oil analyst Osama Rizvi told ProPakistani that it’s still not clear whether the oil price war has ended or not.

He noted,

OPEC+ will cut 9.7 million barrels a day — just below the initial proposal of 10 million. The U.S., Brazil, and Canada will contribute another 3.7 million barrels as their production declines, according to Bloomberg.

It leaves us with more questions that are;

  • Will U. S. cut production or does this 3.7 MBPD represent a natural decline in production which will happen gradually?
  • What is the baseline? Recent production figures or previously reduced ones (as per Vienna Agreement)?
  • If the answer to the first question is Yes. What about the U. S. antitrust laws?

Osama stated that there hasn’t been a communique from G20 about a proper figure of production cuts. There is room for confusion – hence, bearishness.

These cuts are divided into time periods, noted Osama.

  • The amount will fall as we move ahead.
  • It isn’t clear whether U. S. will cut its production in real-time.
  • The main and most significant concern is: Is this enough?

The reaction of the oil markets is instructive to mention here, said the analyst. He added that prices are still in the lower 20s (WTI), which shows that the market shares his concern.

He had more questions regarding the cuts that are,

  • Will it be enough?
  • What about the ongoing confusion regarding the numbers?
  • What is going to be the length of these cuts?

These are the questions that are yet to be answered. He further added that the demand might fall by more than 30 MBPD.

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