The OPEC++ Deal: Calling it a Half-Measure is an Exaggeration

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Crude oil crisis caused by Coronavirus. Downward graph of crude oil value.; 3D; 3D Illustration

Let’s be honest: The so-called OPEC++ agreement to cut 10 million barrels of oil per day from global crude oil supply is a half-measure. Really, with Rystad Energy reporting that demand for oil will drop by 27 million bopd from January 1 levels during April, calling it a half-measure is an exaggeration.

Even this half-measure has still not been finalized, as Mexico’s government still has not committed to holding up its end of the bargain as of this writing on Friday morning. So, anything could still happen. All of which explains why the oil markets reacted negatively to the OPEC++ announcement, with oil prices dropping by more than 15% in just a few hours.

But here at least are the parameters of the agreement that are being reported Friday morning:

– OPEC++ (the OPEC nations plus Russia, Mexico, Canada, Brazil and several others) agree to cut 10 million barrels per day of exports from April through July;

– The cuts drop to 8 million bopd from August 1 through December 31;

– The cuts further fall to 6 million bopd beginning January 1, to continue for the next 16 months;

– The cuts include no formal contribution from the U.S. oil and gas industry.

President Donald Trump will discuss his views of America’s contribution to a reduction in global supply in a call involving the Group of 20 – or G20 – on Friday. The G20 countries are illustrated below:

Country members G20 flags

Thus far, the President has been non-committal regarding any formal, government-mandated production cuts coming from the U.S. due to the limited powers of the federal government to restrict production in any real way. However, projections of the loss of U.S. oil production due to current market conditions now range from 2 million to 4 million bopd, depending on how long the demand-killing economic fallout related to COVID-19 lasts. Those losses in U.S. production due to market conditions could become even greater if, as Rystad and others are predicting, global crude storage capacity becomes 100% full in the weeks to come.

The calculation by OPEC++ appears to be that its collective supply reductions, combined with the loss of several million bopd by U.S. producers, would address roughly half of the current market glut. With Rystad and others projecting a return of demand as the global economy restarts in the coming months, the supply and demand curves could meet sometime around the end of the third quarter of the year.

Assuming that all works out as planned (never a safe assumption), oil prices would rebound significantly later in the year. The question for U.S. producers with weak balance sheets, dramatically reduced cash flows and heavy debt loads becomes whether they can weather this “perfect storm” of negative market factors for the next 4-6 months. We can be sure that many will be unable to do so, and will be forced into bankruptcy.

Bottom line: OPEC++’s half-measure may be better than no measure at all, but for many domestic oil companies, it isn’t nearly enough.