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Mixed news flow on proposed expanded OPEC+ output cut deal
An extraordinary virtual meeting of OPEC+ has been delayed from 6-Apr’20 to 9- Apr’20, but Alberta and Norway plan to join the meeting and are ready to cut output. US cutting oil output is crucial to any deal; news flow on output cut by US is mixed. US has threatened tariff imposition on oil imports if OPEC+ do not cut output. US has made available 30m bbls of storage capacity to US oil companies. Texas oil regulator plans a virtual public hearing on pro-rata production cuts on 14-Apr’20 with a decision likely on 21-Apr’20. Proposed output cut of 10m b/d may still mean global supply surplus (15m b/d as per IEA) in Q2CY20 due to steeper demand decline. However, implementation of a deal may stabilise and put a floor under the oil price, which would be encouraging for ONGC.
* OPEC+ meeting delayed to 9-Apr’20; Alberta and Norway to join meeting: An extraordinary virtual meeting of OPEC+ has been delayed to 9-Apr’20 from 6-Apr’20. The delay together with the blame game between Saudi Arabia and Russia for the collapse in oil prices and for targeting US Shale may lead to correction in oil price. Alberta, which accounts for 80% of Canada’s 4.7m b/d production, and Norway (output 1.4m b/d in CY19 and 1.76m b/d in Dec’19) plan to join the OPEC+ meeting, which is open to all oil producing countries. They are also ready to cut output.
* US may impose tariffs on oil imports if OPEC+ does not cut output; storage made available to oil companies: There was no talk of output cuts at the meeting US president and Republican senators had with oil & gas CEOs on 3-Apr’20. The senators expressed their disappointment with ally Saudi Arabia for flooding the market with oil and bringing down oil prices to levels, which threaten jobs in the US oil industry. Some threatened to bring legislation that stops military aid to Saudi Arabia if they do not cooperate with the US in reviving oil prices. US president has indicated that imposing tariffs on oil imports was not plan-A, but “if US is not treated fairly” (i.e. OPEC+ does not cut output), it was an option he would exercise to protect US oil companies and jobs. On 2-Apr’20, department of energy made available to US oil companies storage capacity of 30m bbls and promised 47m bbls later; this will enable them to continue production instead of cutting output due to inadequate capacity.
* Texas oil regulator to decide on output cut on 21-Apr’20; output in other states to be hit by demand fall, inadequate storage and low oil price: Texas oil regulator has fixed hearing on 14-Apr’20 (on complaint by two independent companies) to consider pro-rata output cuts given the likely oversupply due to demand collapse. Decision is likely on 21-Apr’20. One of Texas regulator’s three commissioners is in favour of an output cut and cut would be imposed if one more comes to the same conclusion. Oklahoma has a similar mechanism for cuts. 20% cut in Texas and Oklahoma (46% of US output) would imply 1.2m b/d output cut. Sharp decline in demand, inadequate storage and far lower prices than benchmark WTI could mean output cuts in some other states like North Dakota (Bakken). Fall in US onshore oil rig count by 18% (121) in the last three weeks also suggests output decline is imminent.
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