The Art of a Failed Oil Deal
After a brief one-day wonder rally, and a choppy one at that, Crude is back below $20 despite OPEC, the US, Mexico and other nations agreeing to production cuts.
Yesterday, the Wall Street Journal was crowing about The Art of an Oil Deal.
President Trump has been chasing a diplomatic victory, and he got one this weekend when he brokered a deal between the Organization of the Petroleum Exporting Countries (OPEC) and Russia to limit their production that may also limit the bloodbath in the U.S. shale patch.
OPEC and Russia have agreed to curtail their production by 9.7 million barrels a day—about 10% of global output—in May and June amid a steep falloff in demand due to the coronavirus that is expected to exceed 20% of last year’s consumption.
So credit to Mr. Trump for using U.S. global influence to mitigate the mayhem. Russia and Saudi Arabia have agreed to take on the bulk of the cuts. After Mexico balked at an order to cut its production by 400,000 barrels a day, President Trump volunteered the U.S. to cover 300,000 barrels of its share.
These cuts won’t be enforced by the U.S. government and will come out of the two million or so that domestic production is forecast to fall. OPEC says sanctions on Venezuela and Iran, in addition to expected reductions by producers such as Canada, could lop off 20 million barrels a day from global supply this year, which, voila, would match demand estimates.
This math may be as illusory as a desert mirage, but it allows the Saudis to save face. And while some over-leveraged shale producers may still fail, the deal should also put the kibosh on calls for tariffs or quotas.
Deal Immediately Failed
It took all of one day for the deal to fail.
It had to.
No one is forcing the cuts and no one will, except the market, of course.
Here's the Real Deal: As soon as storage facilities fill up, nations will have to curb production.
Trump did not negotiate a thing that was would not have occurred on its own by brute force of the market.
A cut of 9-10 million barrels was not enough. So the price fell after a brief market surge.
Hooray, the Saudis saved face. But what good did it do? The cuts were coming because they had to.
If demand destruction amounts to 20 million barrels per day, guess what?
Production will ultimately fall by 20 million barrels per day, deal or no deal.
The WSJ editorial board did get one thing right: It's an illusion.
Mike "Mish" Shedlock