Crude Oil Tumbles Amid No Agreement On Production Cuts

Intermediate
  • The Opec meeting wanted to cut production
  • Russia, blocked such a move, claiming it can cope
  • The market is falling as demand forecasts plummet on Coronavirus fears
  • The price of WTI is in decline, it will break below $37

OPEC and non-OPEC allies (OPEC +) gathered in Vienna on March 5th and 6th looking to reduce production. However, they again failed to agree on this matter. The Russians reportedly refusing to give the green light to the deepest supply cuts since the global financial crisis over 10-years ago.

WTI prices initially slipped on Friday afternoon as reports of the Russian resistance broke through to the market. Later during the day, Reuters further reported that OPEC+ had even failed to agree on rolling over existing cuts.

To make matters even worse, the Russian Energy Minister, Alexander Novak, said it meant that members could now pump what they liked starting April 1. Just another dead weight on crude.

The rapid sell-off has created a sense that there could be a bounce back early on Monday. However, as Figure 1 reveals the technical sentiment soon turn back to favour heavy selling and the momentum of the market sentiment fades.

Time technicals

Figure 1: WTI Technical Sentiment    Source: www.investing.com

The lack of agreement underlines the tricky tightrope that many oil producers now must walk amid collapsing demand as the influence of coronavirus deepens. Do they seek to sell as much as possible to maximise revenue with the current prices, or seek to sell less albeit at a higher price?

Trying to calculate the price elasticity of demand for all variations of oil is proving extremely difficult as each day new restrictions of travel and economic activity come to the fore.

A Return To Talks

It would not be at all surprising to see another round of discussions convened, even if they must be managed by conference call.

Before coronavirus, the major oil producers were building their production schedules on the fact that China was importing 10% of the world’s oil production. However, Bloomberg reported Chinese oil demand has fallen by about 3 million barrels per day, a 20% decline, as coronavirus weighs on the economy. Other reports, (Reuters), reveal that oil demand in China alone could be down as much as 30%.

It well be the case that the Saudi’s will push for another meeting; they have been long standing advocates of a deeper cut, perhaps as much as 1.5 million barrels per day (bpd). Unfortunately, the long running Russian response has been that they do not see a need.

Russia may have a break-even price of $42/barrel; however, the price decline is tearing gapping holes in Vladimir Putin’s spending pledges of $60 billion on much need infrastructure and social spending.

One must then wonder why the Russians are so opposed to a reduction in output. Unless prices stabilise and pick up the flow of funds into the “Russian National Wealth Fund” (RNWF), there will be a fall in the value of funds flowing to the RNWF.

Russia has made plans for the oil price to run at $55/barrel in 2020 and $50 in 2021. That is not looking so clever right now!

If the oil price falls not only will the flow of funds for the RNWF decline but the Rouble will also decline so impacting Russia’s ability to import. Euromoney reported on March 1 that the correlation of USDRUB and oil prices was 83% since 2010. I sense there will be further discussions and the previously agreed round of cuts will be extended from March 31 out for six-months to September 30 as the full economic impact of coronavirus is absorbed.

As such the oil price that tried…and failed to establish a floor at $44.80/barrel at the end of February has now started to venture into the extension zone. The market closed on Friday at $41.69/barrel and I am looking beyond any small bounce that may materialise on Monday morning.

I seek a slip again to $36.99/barrel; a level that will persuade the Russians to return to talks. However, I remain bearish on oil. There will be no respite until there is a viable vaccine for coronavirus, or until the media stops overreacting and returns to sensible, not sensational reporting. Just like in 2007 to 2010, there seems to be a media scrum as to which broadcaster can have the most unsettling story.

Fibonacci and Extension

Figure 2: Technical Levels & Extensions For WTI April 2020 (CLJ0)                                             Source: www.investing.com, Spotlight Group

Macroeconomic Strategist

Stephen Pope is the Managing Partner of Spotlight Group. He has worked in the world of finance since 1982 and has performed d... Continued

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