We are a mere 7 days into a new year, and have already seen the first oil rally in the markets. Many factors have played a role in the first rally of the new year. Oil has been tumultuous over the last 11 months but has seen some stability and positivity since Biden’s election win in November. Biden was confirmed by the senate to be the 46th President of the United States of America and he will have a democratic controlled House and Senate to put his plans into action.
Many investors are awaiting the OPEC+ decision on whether they plan to increase oil production even as the Covid-19 virus brings fear of another spike in cases.
During last week’s OPEC + meeting the group agreed to keep production cuts of 9.7 million barrels per day until the end of July. This effort has helped bolster oil prices to levels of almost double the values in April. The prior OPEC + meeting brought forth the creation of a new advisory group, the Joint Ministerial Monitoring Committee. According to Reuters, “To step up consultations on the effectiveness of the agreement, OPEC+ also agreed that a panel called the Joint Ministerial Monitoring Committee or JMMC, will meet monthly until the end of 2020. Its first such meeting is on Thursday next week… “It’s an advisory committee that can make recommendations,” one of the OPEC+ sources said of the JMMC’s role, declining to be identified by name.” The member nations that compose the JMMC are Algeria, Kuwait, Venezuela, Nigeria, Iraq, United Arab Emirates and Saudi Arabia, plus non-OPEC countries Russia and Kazakhstan.
Unless you’ve been living under a rock since February 2020, you’ve probably noticed the economic impact worldwide of the novel corona-virus, Covid-19. There has been little to no positive news even as Governors ease restrictions and states/counties move from red to yellow to green phases, until the May 2020 unemployment rates were released days ago. According to the Bureau of Labor Statistics, May saw an increase of 2.5 million jobs and an unemployment rate of 13.3%, down from April’s 14.7%. This number came as a overwhelmingly positive shock as most experts had predicted it to increase to near 20%, the worst figure since the Great Depression.
As we near the end of May, we will put behind us one of the most bullish rallies for the WTI crude oil contract in history with crude jumping almost 75% this month alone. Of course, with WTI prices currently trading at $33.33/barrel, that’s not saying much, as it is widely perceived the breakeven price for domestic crude producers is $32/barrel. The question is: will this rally persist? Let’s review some components to watch out for this summer.
OPEC+ reached an agreement to cut 9.7 million barrels per day (mb/d) beginning in May which is a record-breaking cut, but it still may not be enough to stabilize the market. U.S. Secretary of Energy Dan Brouillette said that the total number of cuts globally, when you add in all the non-OPEC countries, should be closer to 20 mb/d. In reality, the number is much smaller than that and will still have an impact, even if it’s not the cut some were expecting. The cuts will help prevent a complete meltdown, even if there is no immediate price rally. The deal is expected to stabilize the global oil price and reduce the market volatility according to Bank of America Merrill Lynch.
The Organization of the Petroleum Exporting Countries (OPEC) and allies agreed yesterday to cut production of crude oil by 9.7 million barrels per day (bpd) in May and June, 7.6 million bpd July – December, and 5.6 million bpd January 2021 – April 2022. The 9.7 million bpd is roughly 10% of the global supply. Reuters reports, “The cut by OPEC+ may be more than four times deeper than the previous record set in 2008 and overall oil supply may shrink by twice that with other measures, but the reduction remains dwarfed by a demand drop predicted by some forecasters to be as much as 30 million bpd in April.” It was not long ago in early January that Brent crude was trading above $70/barrel but with the relentless Coronavirus pandemic, that number dropped to a 20-year low of $21.65/barrel on March 30th.
The OPEC meeting that concluded today in Vienna ended with ministers approving productions cuts for the first quarter of 2020. The cuts for OPEC+ will be increased from 1.2 million bpd to 1.7 million bpd. A 500,000 bpd cut should be painless for the organization as they are currently at over-compliance with the cuts as a group. Saudi Arabia has been carrying a large portion of the cuts to compensate for the group’s non-compliant members including Iraq, Russia and Nigeria. The group is now tasked with divvying up the cuts and enforcing the members compliance with the cuts.
International Energy Association (IEA) reported booming U.S. output will offset falling exports from Iran and Venezuela.