Oil Swings Between Gains And Losses Amid Uncertainty Over Production Cut Deal

Vladimir Zernov
·3-min read

Oil Video 07.04.2020

Most Likely, U.S. Will Have To Participate In The Production Cut Deal

The key topic of this week is the negotiations about the oil production cut deal. Previously, oil prices surged on hopes that major oil producers would cut production by 10 million barels per day (bpd) but then pulled back when the meeting of OPEC+ countries was postponed from April 6, 2020 to April 9, 2020.

According to various media reports, Saudi Arabia, Russia and other OPEC+ members want the U.S. to cut oil production as well. In addition, countries like Canada and Brazil will most likely have to participate in the deal.

It remains to be seen whether the U.S. will join the production cut deal. Previously, the U.S. signaled that it was ready to impose tariffs on foreign oil if the oil production cut deal did not work out.

U.S. President Donald Trump has recently mentioned that oil production cuts in the U.S. were happening automatically because of low prices but did not elaborate on whether the country was ready to participate in a coordinated action to improve supply/demand balance.

It looks like both Saudi Arabia and Russia are serious about demanding production cuts from U.S as there is zero sense for leading oil producers to cut production if U.S. oil companies do not participate in the deal but profit from improved oil prices.

Saudi Arabia And Russia Try To Determine From Which Level To Cut Production

Russia did not increase its oil production in April because the market was already awash in oil. At the same time, Saudi Arabia followed a different strategy, and increased its oil production levels to gain market share.

Now, both countries are debating whether any upcoming production cut should be based on average first-quarter production levels or on current production levels. Of course, Saudi Arabia wants to cut its oil production from current levels since it has materially increased its oil production right after the previous OPEC+ deal ended at the end of March.

This is another obstacle on the way to an oil production deal. I believe that other countries would not tolerate Saudi Arabia’s plan to base its oil production cuts on current production levels. We’ll see whether Saudi Arabia is serious about this plan, especially given the fact that the U.S. is its important ally. For now, Saudi Arabia’s desire to keep as much oil production as it can serves as a bearish near-term catalyst for oil.

This article was originally posted on FX Empire