Opec reduction is historical, but not enough!

The fight against the Corona crisis leads to historic measures. Both central banks and governments are trying to use their monetary and fiscal instruments in the best possible way to limit the economic damage. Now, Opec+ is also taking historic measures, cutting oil production by 9.7 million barrels per day (MMBD) in May and June. For the second half of the year, the cutback target is lowered to 7.7 MMBD - from 2021 onward to 5.8 MMBD. The reduction program will run until the end of April 2022, and the USA, Brazil and Canada will also cut their output by 3.7 MMBD.

However, one drawback is that the "package of cuts" compares actual production data with the figures for October 2018. For Russia and Saudi Arabia the so-called reference value is 11 MMBD. However, if one compares the cutback targets within Opec with the current production figures, the actual production cutback is 5 MMBD lower, even with 100% cutback discipline! That's how fast 9.7 becomes actually only 4.7 MMBD - at least compared to the current output level. Since oil demand in the second quarter of 2020 will fall by about 12 MMBD year-on-year, the measures adopted will not be sufficient to stabilise the crude oil market in the long term. The oversupplied situation will lead to another significant increase in inventories in April. At best, the cutback pact sets a lower limit for the Brent crude oil price of between USD 25 and 30.

The decision to make cuts is an important step in the right direction, but the goal has not yet been reached. In the course of the second half of the year, demand will experience a revival, but there will be no major leaps. A sustained recovery in demand is not expected until 2021. We therefore see the oil price at USD 40 in 12 months.

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