Voluntary production cuts by OPEC members show that oil-producing countries are doing what they can to stabilize the market during the ongoing coronavirus epidemic, a strategist told CNBC this week.
Saudi Arabia announced on Monday that it will cut production by an additional 1 million barrels a day starting June 1 in an effort to support oil prices. Following the kingdom’s announcement, the United Arab Emirates and Kuwait also announced supply cuts. This is in addition to an agreement between OPEC and non-OPEC allies, sometimes referred to as OPEC +, to reduce production by 9.7 million b / d from May 1.
“OPEC heavyweights are sort of lining up to try to do what they can to stabilize this market,” said Helima Croft, global head of commodity strategy at RBC Capital Markets.
“We are already starting to see an increase in demand as the global lockout conditions relax, people start driving again,” she told CNBC “Capital Connection” on Tuesday. “So, essentially, what they are doing is acting as an accelerator in terms of rebalancing the market.”
An offshore drilling platform is located in the shallow waters of the Manifa offshore oil field, operated by Saudi Aramco, in Manifa, Saudi Arabia.
Simon Dawson | Bloomberg | Getty Images
However, although there are “green shoots”, the outlook is not clear as the pandemic continues.
“If we were to have a second wave of crisis, if we were to enforce lock-in restrictions, it could really change the trajectory of a recovery in oil prices,” said Croft. “We really have to wait and see what will happen with this virus before we can say that we are clearly on the road to lasting recovery.”
According to data compiled by Johns Hopkins University, more than 4.18 million people have contracted Covid-19 worldwide and at least 286,336 people have died from the virus.
Oil futures have been under pressure for months as the coronavirus crisis crushed demand, while supply increased in April amid price wars. The two main benchmarks have fallen by more than 50% since the start of the year.
It also remains to be seen whether the latest cuts in oil production “will really push up oil prices and help boost the company’s revenues,” said Ellen Wald, president of Transversal Consulting. She added that it will depend on the fulfillment of their commitments by Russia and Iraq.
“These are really the two wild cards of this OPEC + agreement,” she told CNBC “Street Signs Asia”.
Saudi supply reduction
Wald also said the cut in Riyadh’s output was almost a response to the “instinctive” reaction it had when OPEC + talks failed earlier this year.
“Saudi Arabia, in particular, is looking to regain some of the leadership it lost in March,” she said.
The kingdom increased output to 12 million barrels a day after Moscow refused to agree to adjust the oil supply. The policy “really failed” because demand was extremely weak, she added.
Croft of RBC Capital Markets said that Saudi Arabia is now back in “all it takes” mode. “The decision to cut 1 million barrels of production from the market was not planned.”
“It looks like they are trying to give the oil market an adrenaline rush to raise prices, and they really need price in a more constructive place,” she said.
Besides the fact that Riyadh is highly dependent on oil revenues to finance its public spending, a recovery in oil prices will also be “essential” to change public sentiment in the country, said Croft.
The kingdom announced this week an austerity campaign that will see value added taxes triple to 15%, cuts in public spending and the suspension of benefits for public sector workers.
“This is why I think they are so focused on the essentials of doing everything right again, showing that Saudi Arabia will lead the oil market, that they are back at the helm of the ‘OPEC. “
– Natasha Turak and Pippa Stevens of CNBC contributed to this report.