Crude Oil Refuses to Respond to Production Cuts

The Opec meeting wanted to cut production
Russia, blocked such a move, calling for more consideration
The market is falling as Coronavirus has not been dealt with quickly enough
The price of WTI can decline toward $44.50

As February got underway the Joint Technical Committee (JTC) of the Organization of the Petroleum Exporting Countries (Opec) was scheduled to meet in Vienna (on Tuesday, February 4^th – 5^th).

It was expected that the JTC would conclude that the oil market was oversupplied and that OPEC+ should implement further reductions in output.

Opec operates by consensus, meaning all members must agree for the group to cut or increase production. The powerful countries like Saudi Arabia and the United Arab Emirates often compel the others to go along with policy. However, since the end of 2016, Opec has invited non-Opec partners to participate in decision-making, in effect putting them in a position to have the final approval of Opec policy.

The financial press had speculated that OPEC and its allies would consider cutting their oil output by a further 500,000 barrels per day (bpd) given the impact on oil demand from the Coronavirus outbreak.

However, Russia (non-Opec) took a different view saying it was unconvinced and asked for more time to debate and deliberate on the issue, ergo: talks overran.

The past week’s meeting proved again that the oil cartel is currently in the grip of its new partners; particularly Russia who has its own reasons for keeping production at current levels. Largely, because its oil companies and government need the revenue.

The Opec+ group, are considering holding a ministerial meeting on February 14^th – 15th, an Opec source said. This would be earlier than a current schedule for a meeting in March.

Oil Price Declines

Oil has fallen $10 a barrel this year to $56. This is below the level many Opec countries require to balance their domestic budgets. They are clearly concerned that the Coronavirus outbreak in China could cut oil demand by more than 250,000 bpd on average in Q1 2020.

So, one might think that it was in all oil producers interests to ease to oversupply condition by agreeing to a further reduction in output. However, as the deliberations in Vienna continued the lack of hard and clear action led prices lower.

Figure 1: WTI over 10-Years Source: www.investing.com

The 10-Year chart shown above illustrates how WTI has been rotating lower in a long-standing corrective wave, even if there have been two strong sub waves that one could describe as impulsive.

WTI closed at $50.36/barrel on Friday, barely above the seemingly critical level of 47.10. Right now, if that floor were to yield, there would be scope for a deeper decline.

Russian Resistance

Russia’s top diplomat ended the week by indicating a degree of support for further production cuts, maybe as much as another 600,000 bpd in cuts, which come a little more than a month after OPEC+ introduced the last round of cuts following the December meeting in Vienna.

This may be ineffective as China’s oil consumption, by some estimates, is off by a massive 3 million bpd as a restrictions in movement and activity from Coronavirus start to bite. That’s is a serious shortfall in demand, and the sad truth is one can have little sense of accuracy in any data the Chinese release. A classic case of a central state economy unable to deal with any deviation from the pre-determined plan.

If Coronavirus can be contained demand could return quickly, the fear that grips Opec+ is that new cuts may just be phased in as Chinese demand returns to normal.

Oil is in a dangerous place for the long running decline in prices means Opec+ and Saudi Arabia feel a need to act. However, it was quite worrying for the market that Russia’s implied support for more cuts did little for crude prices on Friday.

Figure 2: Technical Sentiment Toward WTI Source: www.investing.com, Spotlight Group

The sentiment is week as no technical indicator has a buy signal. It feels as if this is a market that is sinking under its own weight of excess supply.

Mapping out last weeks range indicates that any further push lower is going to find now support until $46.99/barrel is tested. I do not see this as oversold. I think there is worse to come with a test to $44.50 quite likely.