Production Cut and Central Bank Actions Propel Crude; Weak Demand Across Refineries Persist

Production Cut and Central Bank Actions Propel Crude; Weak Demand Across Refineries Persist

Brent crude oil prices responded sharply on 2 March 2020 over the market speculation of a  possible production cut by the OPEC members and a liquidity boost by the Central Banks across the globe to stem the economic slowdown due to the coronavirus outbreak, which slightly pushed the falling Brent crude spot price to USD 54.28 a barrel (intraday high on 3 March 2020).

Also Read: The Oil Spill: U.S. Refineries Pullback Production as Acquisition Cost Surmounts and Demand Tumbles

OPEC members are all set to hold their 178th Extraordinary meeting on Thursday ahead of the 8th OPEC and Non-OPEC Ministerial special meeting on Friday with OPEC+, and market anticipates a likely extension in the production curb, which was originally planned till the first quarter of the year 2020 and is presently running at 1.5 million barrels a day.

The speculation among energy market participants took roots after the Minister of Energy of Algeria and President of the OPEC Conference in 2020- HE Mohamed Arkab suggested extension in production adjustments till the end of the second quarter of the year 2020.

HE Mohamed Arkab held an extraordinary meeting of the Joint Technical Committee (or JTC) from 4 to 6 February in Vienna, and the JTC response came to the understanding that the coronavirus outbreak had a considerable impact on the oil demand, which has further lowered the economic activities across the globe.

JTC recommended a further adjustment in the production till the end of the second quarter, which further raised a production cut hope among the oil enthusiasts, and as the day approaches, speculators now seem to be largely active.

OPEC Highlights Lower Demand and Higher Supply Globally

In its monthly oil report (February 2020), OPEC revised down the 2020 oil demand by 0.23 million barrels a day against its previous outlook and anticipated that the global oil demand would now grow by 0.99 million barrels a day or at an average of 100.73 million barrels a day for 2020. OPEC also suggested that the revised outlook was mainly due to the impact of the coronavirus outbreak in China, which has significantly lowered the oil demand and impacted global economic activities.

While OPEC downgraded the demand outlook, the consortium upgraded the supply outlook from the non-OPEC countries. OPEC estimates a production growth of 1.88 million barrels a day for 2019, up by 0.02 million barrels a day against the previous estimation.

The liquids production from non-OPEC is projected to average at 64.36 million barrels, and the United States liquids production growth (Y-o-Y) is estimated to average at 1.68 million barrels a day, up by 11,000 barrels a day.

Demand for OPEC Crude

The consortium projects its oil demand to remain 30.6 million barrels per day in 2019, down by 1.0 million barrels against the previous corresponding period. OPEC downgraded its oil demand outlook for 2020 by 0.2 million barrels a day, which could now stand at 29.3 million barrels per day, down by 1.3 million barrels per day against pcp.

Despite lower demand and higher supply forecast and past figures presented by OPEC, the rise in crude oil prices is putting doubts among the investing community concerning investment in the oil market. The oil market is currently under the speculation of a production cut, which seems to be providing a cushion to the falling oil prices.

Rate Cuts Begin

US FED pulled the rate cut trigger and slashed interest rate by 0.50 per cent. This move is of some significance as this is first such move since 2008 crisis. Closer home, RBA also recently cut interest rate from 0.75 per cent to 0.50 per cent.  the coronavirus outbreak has pushed the central banks to revisit their plans for sure. The liquidity gush could support the overall commodity market.

To Know how inflation and Commodity Links, Do Read: Is P/E Ratio A Good Valuation Metric To Value A Resource Stock?

What Led to The Fall in Oil From Its Recent Top?

 The crude oil spot prices recovered to the level of USD 60.28 (intraday high on 20 February 2020) in the wake of the emerging speculation concerning a report, which could help in containing the coronavirus; however, WHO cleared the cloud and suggested that as of this moment there is no medical treatment for the outbreak (for the week ended 21 February 2020).

Post the WHO confirmation, the crude trades such as lower refineries input across the globe, lower net import across the United States, unfolded and crude fell to its recent bottom of USD 49.37 a barrel (intraday low on 28 February 2020).

  • United States Oil Trades

While the push in prices amidst market speculation is evident, the United States crude oil figures are depicting something else. The United States refineries are among the top consumer of OPEC’s crude amid their installed capacity to process heavy crude oil, which OPEC supplies as compared to the domestic sweet crude from Texas.

However, currently, the acquisition cost for the United States refineries have been equivalent to the domestic oil acquisition cost, which is somewhat putting further pressure on the OPEC oil demand, and in turn, on the crude oil prices amidst a weaker gross input and net output from refineries across the United States.

As per the latest weekly petroleum report from the United States Energy Information Administration, the net imports plunged for second consecutive week to stand at 2,560 thousand barrel a day (as on 21 February 2020), down by 14.18 per cent against the previous week, which coupled with higher domestic production led towards a gain of 500 thousand barrels of oil in the commercial inventory, which stood at 443.3 million barrels (excluding the strategic petroleum reserves) (as on 21 February 2020).

The oil refineries input averaged 202,000 barrels a day lower (as on 21 February 2020) against the previous week to stand at 16.0 million barrels a day, and the United States oil refineries operated at 87.9 per cent of their capacity.

To summarize, the oil market is currently rising on speculation, and the previous fall before the rise was mainly due to the lower demand of OPEC oil across the United States amid equivalent acquisition cost for domestic and foreign crude and COVID 19.

The speculation is mainly due to the early indication of a possible production cut by OPEC and signs of ease in monetary policy across the globe to support the slowdown in respective economies caused by the coronavirus outbreak.

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