What did OPEC decide? Will the G20 meeting bring any changes?

What did OPEC decide? Will the G20 meeting bring any changes?

Yesterday  OPEC + group finally decided to establish a new agreement regarding production cutts. As usual, we can summarize this meeting by saying "from a large cloud, little rain". Despite many hopes and speculation, OPEC provided more or less what the market expected from the beginning, although it was also known for a long time that it will not be enough. What decisions did OPEC + make?

1. Cutting production by 10 million barrels per day, starting from 1st of May and ending on  30th of June. Later, the cut is expected to decrease to 8 million barrels per day and last until the end of the year. Then from 1st of January 1 next year, the cut is expected to decrease to 6 million barrels per day and last for 16 months (until the end of April 2022). The reference levels for the OPEC + group are to be production levels from October 2018, except for Saudi Arabia and Russia, for which the level was set at 11 million barrels per day. The agreement is to remain in force until the end of the agreed deadline, but it will be reconsidered in December 2021. Moreover, in June a decision will be made as to whether larger cuts are needed.

2. The cuts are to be monitored, the follow-up of the monitoring committee (JMMC) and technical committee (JTC).

Production cuts of 10 million brk per day will be very difficult to achieve. It is likely that Russia and Saudi Arabia will jointly lower a maximum of 6 million barrels per day, leaving 4 million barrels for other OPEC and non-OPEC countries. Among the significant producers from non-OPEC we have Kazakhstan and Mexico. As observers, countries such as Norway, Argentina, Colombia, Ecuador, Egypt, Trinidad and Tobago participated in the agreement. Source: OPEC

So should we observe a rather positive response on the market? However, firstly, it was not enough given the strong decline in demand, and secondly, the agreement depends on Mexico's participation, which did not agree to further cuts. This is not surprising, considering that in less than 2 years production has dropped from around 2.5 million brk per day to just over 1.5 million brk per day. Most oil producers were likely to reduce production by 15%.  At such low levels, 225,000 barrel day would be a really high level. On the other hand, Mexico's failure to sign the agreement can be regarded as a "gateway" for the entire OPEC + group, if no action is taken by the G20. However, it can be seen that the market is completely not buying the fact that the agreement would last for 2 years. The market is looking at the current situation in terms of demand, which is not very good. Oil lost 9% yesterday.

After starting the G20 videoconference, the Mexican president said he agreed to cut production. Mexico has announced a contribution of 100,000 barrels for the day. The United States is expected to provide cuts at 250,000 barrels for the day. It is not determined, however, whether this is to be the whole cut from the US or just a addition to the "Mexican" contribution. As we mentioned, Mexico produces relatively little looking at recent years, and OPEC yesterday required Mexico to cut production at 400,000 barrels per day.

Assuming that demand will actually fall by only 10-13 million brk per day (optimistic forecasts), then even with the cut from OPEC + we will still have a significant oversupply. Source: Bloomberg, XTB.

Therefore, a lot will depend today on the G20 meeting, which was to start today at 14:00. It is worth remembering that these meetings are unlikely to end with any specific measures, especially today, when most of the participating countries are in holiday moods (despite lockdowns associated with the epidemic). On the other hand, Saudi Arabia is the chairman of the G20 this year, and today the United Arab Emirates have been invited to participate in the video conference. If a specific action is announced today (e.g. reduction of production by 5 million brk per day among G20 countries), it will probably result in a positive opening of the oil market on Monday. Nevertheless, there is a very high probability that the rebound will only be short-lived and further moves on the oil market will depend on fundamental factors.

After Mexico's statement, it now seems that today's G20 meeting will not bring any other resolution. Declaration of production cut from the US at 250,000 barrel per day, which was announced by Mexico, looks "funny" given that the US produces 13 million barrels per day. Of course, it's worth remembering that production in the US will drop anyway (is this 250,000 an addition to what will drop anyway?), But the question is how will the current situation develop in the future.

Today the oil market is closed. What to pay attention to? For contracts on RUS50 and oil currencies such as NOK, CAD and MXN. On the other hand, the dollar is still  weakening (due to good moods at the end of this week), which causes the strengthening of oil currencies, despite the fact that oil ended the yesterday's session in negative moods. However, in the case of any positive actions on the part of the G20, we should observe today the strengthening of oil currencies, as well as the increase in RUS50 (oil and RUS50 with reversed axis, USDNOK and USDCAD pairs). Source: xStation5