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Oil Has Limited Downside From Here Even Though Math For A Cut Never Added Up

Mar. 09, 2020 10:56 AM ETUnited States Oil Fund, LP ETF (USO)63 Comments
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MMR Research


  • OPEC and allies failed to agree to output cuts in March.
  • The math for additional curtailments never really added up in the first place.
  • Economic ramifications of Saudi Arabia’s unilateral cuts are becoming more painful.
  • Q2 2020 glut could be in the 2.0-2.5 million b/d range.
  • Limited downside in oil from here as demand side concerns are exaggerated and we expect the price war to be short-lived.

In line with our prediction, OPEC and allies failed to agree in March

As we had predicted on February 24, 2020, OPEC Cannot And Will Not Cut Production In March, OPEC+ failed to agree to a cut in their meetings on March 5 and 6. OPEC had proposed or attempted to impose a 1.5 million b/d additional production curtailment. Notwithstanding, Russia refused to agree to deeper cuts. The proposal had envisaged OPEC members cutting 1 million b/d with non-OPEC producers slashing by 500,000 b/d. Prior to the meeting, there was undue excitement among the analyst community with the market hoping for a cut ranging from 600,000 b/d to 1.5 million b/d.

The math for additional cuts never really added up in the first place

We were skeptical of this from the beginning. And that is because the math for additional cuts never really added up. We believe that in order to gauge a producer’s willingness, capacity and room to make additional cuts, we need to consider two things. The first is to check compliance with their existing quotas and the second is to see where production is from a historical perspective. Except for Saudi Arabia, Kuwait, UAE, Angola and a few smaller players, most of the countries (including Russia) did not meet i.e. exceeded their output quotas for most of the months since 2H 2019. Chart 1 shows this for January 2020. The reluctance to comply stems from the fact that production levels for most of the countries (both OPEC and non-OPEC) are already significantly low from a historical perspective. Exceptions are Russia, Iraq, Kuwait and UAE. Since end-2018, OPEC has been lowering quotas through various means including setting reference levels and encouraging members to adhere to “voluntary” (read lower) production levels. Chart 1 compares individual January 2020 outputs with the peak production levels of all OPEC+ countries. To compare historical production, we believe that 2014 is the pertinent reference point and not 2008. This is because during this time

This article was written by

MMR Research profile picture
An experienced Long, Short & Contrarian analyst specializing in identifying profitable bottom-up opportunities. Specialist in Energy, Crude oil, Chemicals and Industrials. Extensive experience of covering Emerging Markets & Middle East equities.

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