Shortly after Mexico won a historic "Mexican standoff" with Saudi Arabia on Sunday afternoon, and was exempt from a historic 9.7mmb/d oil production cut by OPEC+ member states (which Mexico had held up for the previous 4 days after refusing to agree to the across the board 23% cut), we said that "OPEC Reaches "Historic" Deal To Cut Oil Production As Mexico Wins "Mexican Standoff" With Saudis... But It's Not Enough."
A few hours later, Goldman echoed what we said in a note titled "A historic yet insufficient cut", writing that "taking into account updated core-OPEC production guidance from April, this 9.7 mb/d "headline" deal represents a 12.4 mb/d cut from claimed April OPEC+ production (given the Saudi, UAE, Kuwait ongoing surge) but an only 7.2 mb/d cut from 1Q20 average production levels." Doing the math, the Goldman analyst calculated that "the OPEC+ voluntary cut would only lead to an actual 4.3 mb/d reduction in production from 1Q20 levels" adding that "based on our updated oil balances, such OPEC+ voluntary cuts would still require an additional 4.1 mb/d cut in May production at the binding storage capacity constraint" which means that "at the 35% compliance level outside of core-OPEC, the necessary production cuts need would need to be 0.5 mb/d larger."
In short, and as we have been repeating all along, the 10 9.7mmb/d production cut is nowhere near enough to offset the plunge in demand which based on various estimates is anywhere between 20 and 36mmb/d.
It's also why after knee-jerking higher, oil - which had priced in a 10mmb/d production cut as far back as the middle of last week - has been drifting lower...
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... in the process infuriating the US president who had hoped the OPEC+ deal would send oil sharply higher. Alas, even algos can do math now, and everyone by now understands that a 9.7mmb/d supply cut is nowhere near enough to offset 36mmb/d in less demand.
The result: after watching Brent drift lower, Trump finally snapped this morning and in hopes of doing OPEC's job for them, the US president tried his best to jawbone oil higher by saying that "the number that OPEC+ is looking to cut is 20 Million Barrels a day, not the 10 Million that is generally being reported."
Trump has a point... the only problem is that 20 million b/d number also includes several million in US production cuts, which Trump refuses to order! In fact Trump believes that between covering Mexico's 300kb/d shortfall (which will be met with organic production declines not an actual supply stop as of May 1), the US does not need to cut further.
So if Trump really wants to send the price of oil higher - and he does to avoid mass layoffs in the re-election critical state of Texas even if it means much higher gas prices at the pump - it is up to Trump to somehow find 2-3 or more million barrels in US production cuts. Without those, Brent will keep drifting lower because while the US president may not do supply/demand math, everyone else in the energy sector now does.
By Zerohedge.com
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Comments
The United States claims that it is the world’s largest crude oil producer produing 13 million barrels a day (mbd). If that is true, then it can afford to contribute at least 4 mbd to the 20 mbd President Trump is asking OPEC+ to cut. Deeds speak louder than tweets.
Still, any cuts no matter how big they are will hardly have a positive impact on prices while the coronavirus outbreak is raging.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
In essence, Trump just approached the world and said: "Hey, our zombie oil producers that never got any real profit and are in debt above their head cannot compete in these conditions and survive. But because we are America and we are strong and because we have always believed that the one who is stronger is righter and morally better, I will intimidate and coerce by force and bullying you into cutting the production, basically by force taking your money and giving it to my anti-market oil producers" Simple. A highway robbery in broad daylight on which the US calls "a world deal".
But the problem is: in this particular situation it is hard for him to do anything about it. America is strong but not infinitely strong and not under any conditions. He can slap on tariffs forcing its own transport, manufacturing and private consumers to pay 50 USD/barrel instead of 30, but at this point of time everybody clearly understands, including Trump, that these tariffs will be on America itself and it is not going to help too much to get the economy out of its present coma during/after covid-triggered crisis.
My personal view: this is a real reckoning hour for the US shale. Too freaking bad.. At least in 2-3 years oil will return back to where it belongs in terms of price and stay there or go even higher. By the way, that is exactly the reason why Trump is anxious about the US shale: he doesn't give a damn about shale producers as such, he is afraid that their irreversible destruction will permanently shave off ~10 million bbl/day and then oil prices will go from 20 USD to 120 USD..
Really like your comments to the articles, always look for.
You should write some articles here in the front page
Regards