13 April 2020

OPEC+ Historic Deal Puts an End to Oil Price War

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What’s happening: The world’s top oil producing nations signed a major deal to reduce global oil production by nearly 10%.

What happened: The historic production-cut agreement puts an end to the fiery price war between major oil giants that brought the whole energy sector down to its knees.

After a long series of calls and virtual conferences between the leaders of the OPEC+ countries and the G-20 group, a deal was finally reached to control the decline in oil prices as the coronavirus pandemic dents overall demand. Investor focus now returns to whether the cut will prove sufficient to lift the energy sector as shutdowns continue to impact the global economy.

Why it matters: The OPEC+ talks seemed to fall apart last week, with Mexico resisting its allotted cuts. Talks came back to life after the intervention of US President Donald Trump. Mexico won the battle as the country will now be reducing production by only 100,000 barrels per day, versus the allotted 400,000 barrels.

Following the deal, the OPEC+ group will cut output by 9.7 million barrels per day, down from the earlier proposal of a 10 million cut. The deal was signed after a frightening month for crude, when the global benchmark Brent dipped to its lowest in around two decades. Brent crude tumbled towards $20 a barrel, after trading above $70 per barrel earlier this year. OPEC+ ministers finalised the deal on Easter Sunday, just a few hours before the opening of oil markets.

Brent futures climbed 8% at the start of trading in the Asian session but gave up most of the gains. Brent crude was trading higher by 0.5% at $31.65 per barrel in the European session, while WTI crude traded higher by 0.4% at $22.86 per barrel.

With the coronavirus halting air and ground traffic, demand for diesel, gasoline, and jet-fuel has collapsed, threatening the future of the US shale industry.

The oil production cuts are expected to remain in place for around two years, with variations in cuts at intervals. The initial 9.7 million barrel cut is planned to be tapered to 7.6 million per day from July till the end of the year, and will be lowered again to 5.6 million starting 2021 until April 2022. US oil producers have already reduced their output following soft demand and are on course for a production cut between 2 million and 3 million barrels per day, the US Department of Energy reported

The OPEC+ deal will take effect from May 1, leaving member nations to keep flooding the markets till the end of the month.

What to watch: Goldman Sachs analysts expect oil prices to continue their decline in coming weeks, terming the cuts as "historic yet insufficient" to offset the slumping demand. With various countries extending their lockdown measures to control the spread of coronavirus, the energy market is more concerned about consumption than supply.

The Markets Today

     

Asian markets dropped today with investors turning their focus to coronavirus news, even as the OPEC+ reaches a historic deal on production cuts.

Context: Japanese and Chinese stocks tumbled on Monday after the OPEC and its allies finalised an agreement to lower oil production by 9.7 million barrels per day. Japan’s Nikkei 225 dipped more than 2%. Although the OPEC+ deal did lift investor sentiment, the production cuts will begin only in May.

Details: Japan’s Nikkei 225 index declined 2.33% with the Real Estate, Paper & Pulp and Railway & Bus sectors leading the downturn. Shares of Toyota Tsusho Corp was down more than 7%, while FamilyMart’s stock tumbled over 6%. The country’s Topix index also dropped 1.54% today. South Korea’s Kospi index traded down 1.1% with shares of SK Hynix declining about 3%.

Mainland China shares also recorded losses today, with the Shanghai composite index falling 0.6% and the Shenzhen composite down 0.5%. Overall, the MSCI Asia index, ex-Japan, declined around 0.3%. The Australian and Hong Kong markets are closed today for Easter Monday.

Coronavirus continues to be the focus among investors. COVID-19 cases in Japan, including the ones from Diamond Princess cruise, have risen past 8,100 with around 149 deaths as of Sunday.

China has been mostly able to control the spread of the virus, although the infection had first emerged in Wuhan. China is facing a new battle, however, with a rise in imported cases as Chinese citizens return home.

What to watch: Market volatility is expected to continue this week, with some new economic reports expected to highlight the extent of the damage caused by the pandemic. The US will start its quarterly earnings season this week with reports from some major banks. China is also expected to report its balance of trade data on Tuesday, followed by the GDP numbers to be released on Friday.

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India’s inflation rate and China’s foreign direct investment.

 

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