OPEC+ output cut not enough

G Chandrashekhar | Updated on April 10, 2020

Output cut of 10 million barrels per day (mbpd) during May and June and calibrated reduction in cuts in the months ahead as decided by OPEC+ under the leadership of Saudi Arabia is a small yet significant step to stem the rot in the crude oil market.

Although less robust than desired, it is surely a cushion for the market that has been reeling under burdensome inventory and humongous production unmatched by demand following slowing growth globally in the wake of the Covid-19 pandemic.

Inadequate measure

However, when one considers the demand destruction of 30 mbpd, the output cut is substantially less than what is necessary to prevent overflowing storage installations. For this reason, the crude market is unlikely to move too northward in a hurry.

While the US President prompted the OPEC+ meeting to end the stand-off between Saudi Arabia and Russia that had sent the oil market crashing, it is time for other major producers, including the US, to pitch in. Both Saudi Arabia and Russia will surely put pressure on the US to commit to cut shale oil production.

If and when that materialises, it will provide further fillip to the market. If the US does not play ball, OPEC+ may even threaten to annul the decision to cut output. In its own interest, the US is most likely to join the OPEC+ bandwagon.

If the pandemic shows signs of coming under control over the next two months, it would be great news for the energy market. The second half of the year will witness a gradual recovery in economic activity around the world which will boost consumption.

However, for any reason, if the pandemic does not come under full control, the world will go into recession, which in turn will result in further demand destruction and inventory build-up.

Fall in demand

One report estimates that Indian demand has plunged by as much as 70 per cent following the nationwide lockdown since March 26. To be sure, India is the world’s third largest consumer of crude oil with import dependence in excess of 80 per cent.

On current reckoning, and subject to the US joining to cut output, Brent is likely to continue to trade in the $30-35 a barrel range. At these levels, some speculative capital is also likely to enter the market which will be supportive. India must monitor the market closely and continue to maximise its purchases.

The writer is a policy commentator and commodities market specialist. Views are personal

Published on April 10, 2020

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