Historic OPEC+ deal saves Oil from freefall but does not promise fast growth

OPEC+ made a historic agreement. The price wars between Saudi Arabia and Russia are over, and this supported the oil. The new week starts with more than a 5% jump in oil quotations on promises of major producers to sharply reduce oil supplies in the coming months.

According to estimates of Saudi Arabia and Kuwait, in the next two months, Crude Oil producers will reduce production by 19-20 million barrels per day. In addition to the agreed cuts of 10 million barrels under OPEC+, some Gulf countries promise to voluntarily remove another 2 million barrels, G20 countries and the rest about 7 million more.

This was hard to believe a few months ago, but these cuts could be almost half the drop in real demand at the moment. Big countries-consumers may announce the start of oil purchases to their strategic reserves as soon as on Monday to support the market further and use the situation to buy at historically low prices.

The announced cuts are a psychological support factor, which can reduce market volatility. Investors have received an informal threshold: a drop of oil to $20 forms an area of support from both producers and consumers.

However, it should not be assumed that from now, the oil market will go up. And there are several reasons for that. Firstly, significant reserves have already been accumulated during the month of price wars and the global pandemic. However, supplies cut will start only in early May.

Secondly, world demand has collapsed twice as much as the agreed cuts by countries. Filling storage facilities, as the US experience showed earlier in March, may face bureaucratic delays.

Third, the recovery of global demand promises to be slow. China’s economy is willing but unable to fully restore its forecasted growth rates as it faced a demand collapse in Europe and the US.

A likely strategic win scenario for Russia, Saudi Arabia, and some other traditional oil exporters would be the ability to survive a period of depressed-low oil prices longer than companies in wealthier countries like the US, where the cost of pumping is higher. For oil prices, this could be the final point during a period of rapid oil price collapse. However, bulls should keep in mind that the steady growth of prices should be expected only at the signs of recovery in real demand.

The FxPro Analyst Team