Will OPEC+ Cut Production?
April 3, 2020
The energy markets have been extremely volatile over the last couple days. Yesterday when the tweet from President Trump went out that Saudi Arabia and Russia were going to work to limit production by 10 million barrels or more crude oil rallied over 40% in just a few minutes. The initial run up was faded and prices pulled back off the highs. Prices were flat for the open of overnight trading today, but it didn’t take long for another rally to begin as news came out that OPEC + group of producers will have a video conference on Monday.
Some are skeptical about the tweet and the news about cutting production. The demand destruction caused by the coronavirus has been huge and even if Saudi Arabia, Russia, and other OPEC members can manage to take 10 or even 15 million barrels off the market it will help but it will not be enough. Ultimately it will require the involvement of the United States and the market is not sure how that will work at this point in time. At some point if no unofficial production scale back happens it will be lower prices that finally shut down much of the US energy industries to reduce supplies. The US has antitrust laws the prohibit a mandated on production. Some analysts think the individual state may act but as of now the market will have to wait and see what the US response might be. President Trump is meeting with energy companies over the next couple days and that may help give us a clue of potential actions.
Again, the details about the cuts leaves a lot of unanswered questions and the market will have to sort out the details as they become clearer. Some question whether it is physically possible for Russia and Saudi Arabia to make that substantial of a cut. All of us will need to stay tuned to see how the details emerge and what part the United State may play.
Here are two key questions that investors want answers to, as well as, all of us, but at this point in time are still very unknown, as reported by Bloomberg. What will be the duration of the economic shutdown and social lockdown? And the second one is; what will be the shape of the post-reopening recovery? Very difficult at this time to know how much of this will transition as we move forward and as of now have not at this point seen the worse.