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OPEC+ Agrees to Oil Output Cut, Puts an End to Price War
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In a historic move, OPEC and its alliance partners have agreed to a massive 9.7 million barrels per day (bpd) production cut, as the coronavirus pandemic and a month-long dispute between Saudi Arabia and Russia shattered oil prices. This agreement effectively ends the price war between these two nations. President Trump played a significant role to resolve the deadlock between Saudi Arabia and Mexico, which helped seal the broader deal yesterday.
Production Cuts
The 9th (Extraordinary) OPEC+ meeting signals at a production cut by Saudi Arabia by 3.3 million bpd from the current level of around 12 million bpd to its lowest level since 2011. Russia is expected to curb output by 2 million bpd from the current production level of 10.4 million bpd. Overall, the total output cut by the attendees of the meeting is expected to be 10 million bpd for May and June. From July onward, the production cut will be reduced to 8 million bpd for the rest of the year. After that, for a 16-month period, production will be curtailed by 6 million bpd.
Even though the lengthy agreement is expected to boost the prices in the coming days, market demand will play a determining role in this regard. As such, extension of the production cuts will likely be reviewed during 2021-end. Meanwhile, efforts are also on to include the likes of the United States, Canada, Brazil and other key producers outside of OPEC+ to formally join the pact with additional cuts that will take the production decrease target to around 15 million bpd.
Before moving on to the demand side of the story, let’s see how President Trump’s crucial intervention resolved a Saudi-Mexico standoff, which threatened the agreement.
United States to Help Mexico
OPEC+ requested a 400,000 bpd production cut from Mexico to strengthen global oil prices. However, the country agreed to only 100,000 bpd output curb, which was not enough to satisfy the needs of OPEC+ and could jeopardize the broader agreement. Then the U.S. stepped in, with President Donald Trump agreeing to compensate Mexico’s share by ratcheting down daily volumes by 250,000 to 300,000 barrels – something he said that his country was already doing.
The current uncertain energy environment has already forced most of the energy companies to significantly reduce their planned 2020 spending. While some of the companies expect to retain their 2019 production levels with lower budget, others expect production to decline. This is the act of the free-market system. Major energy companies like Exxon Mobil Corporation (XOM - Free Report) , Chevron Corporation (CVX - Free Report) , BP plc (BP - Free Report) and Royal Dutch Shell plc have slashed their capital expenditure plan. Notably, Chevron and BP reduced their U.S. shale activities to cope up with the current market situation. ExxonMobil, which currently has a Zacks Rank #3 (Hold), announced that it plans to slash 2020 capital spending plan by 30% or $10 billion from its original guidance to $23 billion. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Other energy companies with significant upstream activities like Apache Corporation (APA - Free Report) and Occidental Petroleum Corporation (OXY - Free Report) have also carried out similar moves.
Demand Destruction
The oil market, which is currently suffering from an oversupply problem, has witnessed vast demand destruction due to travel bans and lockdowns caused by the coronavirus pandemic. This month, the global oil demand is expected to decrease 30 million bpd. In the second quarter, oil demand will likely take a hit of 12 million bpd, per the General Secretary of OPEC Mohammed Barkindo.
This brings us to the question: Are the production-cut efforts enough to boost crude prices?
Many analysts are of the opinion that the production curtailment expected to be carried out is not enough for the prices to rise to the previous levels. With worldwide lockdowns wiping out demand for jet fuel, diesel and gasoline, the oversupplied oil market will continue to suffer.
However, the recent cuts are definitely a positive for the U.S. amid the current market conditions. The recent supply cut is expected to reduce low crude prices’ impact on the domestic oil and gas sector before it causes mass bankruptcies. The President also tweeted to thank Saudi Arabian and Russian leaders for their cooperation, which is expected to “save hundreds of thousands of energy jobs in the United States.”
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OPEC+ Agrees to Oil Output Cut, Puts an End to Price War
In a historic move, OPEC and its alliance partners have agreed to a massive 9.7 million barrels per day (bpd) production cut, as the coronavirus pandemic and a month-long dispute between Saudi Arabia and Russia shattered oil prices. This agreement effectively ends the price war between these two nations. President Trump played a significant role to resolve the deadlock between Saudi Arabia and Mexico, which helped seal the broader deal yesterday.
Production Cuts
The 9th (Extraordinary) OPEC+ meeting signals at a production cut by Saudi Arabia by 3.3 million bpd from the current level of around 12 million bpd to its lowest level since 2011. Russia is expected to curb output by 2 million bpd from the current production level of 10.4 million bpd. Overall, the total output cut by the attendees of the meeting is expected to be 10 million bpd for May and June. From July onward, the production cut will be reduced to 8 million bpd for the rest of the year. After that, for a 16-month period, production will be curtailed by 6 million bpd.
Even though the lengthy agreement is expected to boost the prices in the coming days, market demand will play a determining role in this regard. As such, extension of the production cuts will likely be reviewed during 2021-end. Meanwhile, efforts are also on to include the likes of the United States, Canada, Brazil and other key producers outside of OPEC+ to formally join the pact with additional cuts that will take the production decrease target to around 15 million bpd.
Before moving on to the demand side of the story, let’s see how President Trump’s crucial intervention resolved a Saudi-Mexico standoff, which threatened the agreement.
United States to Help Mexico
OPEC+ requested a 400,000 bpd production cut from Mexico to strengthen global oil prices. However, the country agreed to only 100,000 bpd output curb, which was not enough to satisfy the needs of OPEC+ and could jeopardize the broader agreement. Then the U.S. stepped in, with President Donald Trump agreeing to compensate Mexico’s share by ratcheting down daily volumes by 250,000 to 300,000 barrels – something he said that his country was already doing.
The current uncertain energy environment has already forced most of the energy companies to significantly reduce their planned 2020 spending. While some of the companies expect to retain their 2019 production levels with lower budget, others expect production to decline. This is the act of the free-market system. Major energy companies like Exxon Mobil Corporation (XOM - Free Report) , Chevron Corporation (CVX - Free Report) , BP plc (BP - Free Report) and Royal Dutch Shell plc have slashed their capital expenditure plan. Notably, Chevron and BP reduced their U.S. shale activities to cope up with the current market situation. ExxonMobil, which currently has a Zacks Rank #3 (Hold), announced that it plans to slash 2020 capital spending plan by 30% or $10 billion from its original guidance to $23 billion. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Other energy companies with significant upstream activities like Apache Corporation (APA - Free Report) and Occidental Petroleum Corporation (OXY - Free Report) have also carried out similar moves.
Demand Destruction
The oil market, which is currently suffering from an oversupply problem, has witnessed vast demand destruction due to travel bans and lockdowns caused by the coronavirus pandemic. This month, the global oil demand is expected to decrease 30 million bpd. In the second quarter, oil demand will likely take a hit of 12 million bpd, per the General Secretary of OPEC Mohammed Barkindo.
This brings us to the question: Are the production-cut efforts enough to boost crude prices?
Many analysts are of the opinion that the production curtailment expected to be carried out is not enough for the prices to rise to the previous levels. With worldwide lockdowns wiping out demand for jet fuel, diesel and gasoline, the oversupplied oil market will continue to suffer.
However, the recent cuts are definitely a positive for the U.S. amid the current market conditions. The recent supply cut is expected to reduce low crude prices’ impact on the domestic oil and gas sector before it causes mass bankruptcies. The President also tweeted to thank Saudi Arabian and Russian leaders for their cooperation, which is expected to “save hundreds of thousands of energy jobs in the United States.”
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Experts extracted 7 stocks from the list of 220 Zacks Rank #1 Strong Buys that has beaten the market more than 2X over with a stunning average gain of +24.5% per year.
These 7 were selected because of their superior potential for immediate breakout.
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