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...
... 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.
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