Oil crash averted as OPEC + deal reached, but 9.7M bpd in cuts fail to impress markets

With a few hours before markets opened in Asia, OPEC + was able to reach a record deal to cut output and end the Saudi/Russian price war.  In true OPEC fashion, talks lasted an eternity, extending through Friday, Saturday, and a good part of Sunday.  A production cut deal across the globe required extraordinary collaboration, that unfortunately will fall well short of stabilizing oil markets.  Hopes were growing that the total production cuts around the world could total 20-million bpd, so the roughly 15-million bpd in curbs may see any bullishness at the open be short-lived. 

It was not the Russians nor the Texas Railroad Commission that played spoiler, it was Mexico.  Mexico stuck to its guns in only committing to 100,000 bpd in production cuts.  President Trump’s intervention with Mexico’s objection was critical for talks to continue over the weekend.  Trump will probably claim credit that he saved both OPEC and many US shale companies.  The US will take on some Mexico’s production cut burden of roughly 250,000 bpd.  The problem is that the US is applying natural declines in output towards Mexico’s quota.  The number of holes in this production cut deal will make it hard for anyone feel confident that a firm bottom is in place. 

For energy markets to get excited, production cuts around 20 million barrels per day were needed, not the 9.7 million bpd plus another 5 million bpd from G-20 countries.  Oil prices will be lively when markets open, trading for the first time since Thursday.  No one will be surprise if this OPEC event becomes a “buy the rumor, sell the news” event.  Despite the skepticism that this production deal will not see a high-level of compliance, it should end calls for oil prices to fall to single digits. 

Oil prices should remain heavy in the short-term, but that could quickly change if optimism grows that the US and Europe could see major parts of their economy opening by June.  For now, the demand outlook remains bleak, but these production cuts could support the argument that energy markets could see an implied stock draw in the second half of the year. 

There will be a time to eventually turn bullish on oil, but for now WTI crude prices could continue to show signs of stabilizing in the mid-$20s. 

FX

The OPEC + deal should do wonders for the commodity currencies.  The risk was growing for chaos at the open and the Canadian dollar, Norwegian krone and Russian ruble were spared massive losses.  The global oil production cut deal will likely end up being a temporary band-aid in the short-term for oil prices, but the Fed’s unprecedented actions should help keep the dollar vulnerable against commodity currencies. 

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Ed Moya

Ed Moya

Senior Market Analyst - The Americas at OANDA
With more than 20 years’ trading experience, Ed Moya is a market analyst with OANDA, producing up-to-the-minute fundamental analysis of geopolitical events and monetary policies around the world. Over the course of his career, he has worked with some of the world’s leading forex brokerages and research departments including Global Forex Trading, FX Solutions and Trading Advantage. Most recently he worked with TradeTheNews.com, where he provided market analysis on economic data and corporate news. Based in New York, Ed is a regular guest on several major financial television networks including BNN, CNBC and Bloomberg, and is often quoted in leading publications including the Wall Street Journal and the Washington Post. He holds a BA in Economics from Rutgers University.
Ed Moya