SunSirs: Energy, OPEC+ Production Reduction Agreement was not as Expected; Oil Price Fell sharply after Rising

On April 9, the OPEC+ special meeting came to an end. Its production reduction was lower than the market expectation. Oil prices fell again. U.S. WTI settlement was $22.76/ barrel, down $2.33. Brent crude settled at $31.48/ barrel, down $1.36. Crude oil jumped up and down in the market, first rising and then falling. During the meeting, WTI rose to $28.36/ barrel, or 12%. Later, OPEC+ announced the details of production reduction, and market participants turned to bearish, doubting whether the production reduction could be large enough to cope with the decline in demand caused by coronavirus. Crude oil reversed its previous gains and fell more than 9%.

The details of the specific production reduction agreement are as follows: the organization of the Organization of Petroleum Exporting Countries (OPEC) and its allies, agreed to reduce production by 10 million barrels/ day in May and June 2020 to help support oil prices hit by COVID-19, and confirmed that to reduce production by 8 million barrels/ day from July to December 2020; and to reduce production by 6 million barrels/ day from January 2021 to April 2022. OPEC also said that the next video conference will be held on June 10 to assess the market situation.

On the eve of the meeting, the market concerned about whether the meeting could reach an agreement to reduce production by 10-15 million barrels/ day. There was also general confidence in the intensity of OPEC+ production reduction. The U.S. energy secretary also publicly said that OPEC+ might achieve a record production reduction this time, but in terms of the details of the announced production reduction, it was obviously not up to market expectations. During the meeting, OPEC+ paid special attention to whether non OPEC countries such as the United States, Canada and Norway would take production reduction actions, but there was no public conclusion in this regard. This is a hidden danger to the implementation of OPEC+ production reduction in the later period.

From the perspective of demand, at present, the global epidemic is still in the stage of rapid spread. Market experts generally believe that it may last for a long time in the later period. Some institutions predict that the decline of crude oil demand in April will exceed 20 million barrels/ day, or even 30 million barrels. The reduction of demand is used to measure the output reduction of OPEC+, and this agreement obviously does not have a turning force on the market. In addition, at present, we need to consider the issue of inventory. At present, the global crude oil inventory has risen to a record high. In the next few days, the global crude oil storage capacity may be exhausted, which is very unfavorable to the oil price. SunSirs expects that the oil price will remain low in the near future. In the medium and long term, it depends on the development of the epidemic situation. In the context of the contraction of economic activities in Europe and the United States, it is difficult for the oil market to be fundamentally good.

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