OPEC Has Reached Three Major Factors In The Biggest Production Reduction Agreement In History, Deciding The Implementation Effect.

After a long week of negotiations in Beijing on the morning of April 13th, the agreement between OPEC and non OPEC countries was finally settled.

According to the OPEC announcement, OPEC + (including the original OPEC countries and Russia) will reduce production by 9 million 700 thousand barrels per day from May 1, 2020, and reduce production by 7 million 700 thousand barrels per day from July 1, 2020 to December, and reduce output by 5 million 800 thousand barrels per day from January 2021 to April 2022.

It is worth mentioning that this is the largest reduction in production and longest duration, and the most extensive reduction in production agreement since the establishment of OPEC. However, after the agreement was issued, the market did not give very positive feedback.

13 days after the opening, WTI crude oil futures jumped 8%, at 24 U.S. dollars / barrel; Brent crude futures opened up 5%, the highest to 33.99 U.S. dollars / barrel; but then the gains narrowed rapidly. As of press release, Brent crude oil futures price reported 31.38 U.S. dollars / barrel, WTI crude oil futures price 23.03 U.S. dollars / barrel, and the same day the change of the yield reduction agreement was almost unchanged.

"OPEC's reduction of crude oil production by 9 million 700 thousand barrels is basically in line with our expectation of the most realistic and positive results." Wu Kang, chief economist of S & P global Prof, told reporters, "however, this reduction is not enough to make up for the oversupply of 1500-2000 barrels in the market, and therefore, it is not enough to sustain oil prices."

However, some insiders expressed different opinions to reporters. "Many people are pessimistic about the agreement, but in fact, in the medium term, this is a relatively positive result." An oil central enterprise official told reporters, "in particular, the agreement stipulates that the intensity of production cuts will continue until the end of this year, which will support the formation of oil prices in the 234 quarter of this year."

From the understanding of our reporter, the differences between the parties are mainly in the following points: first, the duration of the production reduction agreement, followed by the implementation of the production reduction agreement, and finally the recovery of the demand side, and no matter which aspect of the three dimensions has an accident, it will greatly affect the implementation effect of this agreement.

How effective is the reduction agreement?

This reporter found in many interviews that the market is expected to have a very big difference in the implementation of this reduction agreement, which in itself reflects some problems: the future of the crude oil market is facing great uncertainty.

First of all, judging from the execution time of the reduction agreement itself, OPEC's ideal is very plentiful, but there are many uncertainties in reality. So far, this factor has come from Mexico.

Last Friday, OPEC and other oil ministers meeting had reached an agreement of 10 million barrels per day, but Mexico refused the agreement, which led to the final negotiations broke down. In the early hours of 13, Saudi Arabia and Russia made concessions to Mexico's production reduction, which reduced the production rate from 400 thousand barrels per day to 100 thousand barrels / day before the agreement was finally concluded. Reach.

"On the one hand, Mexico has always been very good at using hedging operations, and its crude oil in April and May has been sold, and the reduction in production has little impact on it." One industry insider told reporters, "on the other hand, the president of Mexico promised to expand crude oil output when he took office, and the reduction of output was inconsistent with its policy."

As a result, Mexico said it would decide whether to withdraw from OPEC in the next two months, which is a question mark about whether the yield reduction agreement can be truly sustainable in the future.

Second, it is the geometry of the implementation of the reduction agreement.

The S & P global przewalskii expects a 9 million 700 thousand barrel / day deal to cut production, which is likely to be close to 600-700 barrels per day, compared with the current excess supply of 1500-2000 barrels per day, which is not enough to bring enough support to oil prices.

"This reduction measure is more like a short-term solution, with the aim of winning the time before June meeting." Wu Kang said.

The above oil central enterprises told reporters that because the agreement fully took into account the affordability of all countries, Saudi Arabia assumed 2 million 500 thousand barrels per day, while other countries cut their output in accordance with the 23% of the first quarter, so the market was somewhat concerned about its lack of implementation.

? ? ? According to public information, the last round of OPEC production reduction agreement began in 2016 and ended in March this year. The overall implementation rate exceeded 100%, of which Saudi Arabia's execution rate was close to 200% in some time. The reduction in production was not only beyond the expected implementation. From the final results, the international oil price not only got rid of the downturn in 2015, but remained in the position of 60-70 US dollars every year thereafter.

Finally, the suspicion of the market lies in the demand side, especially the space in inventory.

This round of falling oil prices is a direct factor, but it is undeniable that the rapid spread of the new crown epidemic in the world is the decisive factor and the most important factor. If the epidemic is not controlled, crude oil consumption will inevitably remain depressed, and the effect of the reduction agreement will also be greatly reduced.

At the same time, another problem that can not be ignored is that since the beginning of the price war in April, the global crude oil reserves have increased rapidly in a short time. Therefore, many organizations and enterprises have reached a consensus that inventory plays a very important role in the implementation of this round of production reduction agreements.

Shortly after OPEC announced the agreement to reduce production, the International Energy Agency said its member states would produce a separate warehouse to buy crude oil in the market. This is undoubtedly a great positive news for the market, and the relevant inventory capacity will be announced on Wednesday.

However, the reserve capacity for oil producing countries may be very limited. According to public information, by May this year, global crude oil inventories will increase by 1 billion 400 million barrels (compared to the end of 2019). Many VLCC (ultra large tankers) floating on the sea are still floating crude oil storage, and how much inventory capacity can be released in this case will take time to verify.

China's opportunities and challenges

There is no doubt that China, as the first to recover in the new crown epidemic, has more initiative and operating space in the face of the volatile oil market.

On the 13 day later, Saudi Aramco released the latest official export price of crude oil. The official price of light oil sold to Asia in May was set at a price of $7.3 / barrel more than the Oman / Dubai average price, a 4.2 US dollar increase compared with the previous month.

This is also seen as an important signal by the market: the focus of competition for the world's crude oil producers in the future will be in the Asian market, especially in the Chinese market. "The main exporting countries in the Middle East will issue their prices after the official price is issued in Saudi Arabia." The above oil central enterprises said, "China will become the focus of competition."

A data can indicate China's "hot" market situation from the side: this year, the international crude oil price has fallen by more than 70%, compared with the wholesale price of diesel in China's market is less than 20%. The main processing capacity of the refineries has begun to recover, and the rate of operation has been gradually increased to 70% after the severe attack by the epidemic.

"In April this year will be the biggest recovery of crude oil processing since the outbreak of the new crown outbreak, and the main refinery will gradually return to the state of January this year." "We believe that the average daily crude oil processing in China this year is about 8 million 900 thousand barrels per day, compared with 9 million 400 thousand barrels per day last year," Sun Lei, a senior consultant of Asia Pacific refining analyst at Wood Mackenzie, told reporters.

Compared with the major economies in the world, China's demand recovery seems to be unique: the daily processing volume of European refineries has been cut by more than 2 million barrels, and the average processing capacity of the refineries in the United States has only been maintained at around 70%. With the possible slow rise of subsequent oil prices, it will be a great benefit for Chinese refineries.

"When the refinery is most comfortable, it is the time when oil prices are rising slowly." The above central enterprises said, "processed crude oil that was purchased at a low price, and sold the refined oil as the price gradually increased, this will bring a very substantial profit to the refinery."

However, China still faces many challenges in this round of crude oil market volatility.

First, the shortage of transport capacity. Because international crude oil futures prices remain at the Contango results (spot prices lower than forward futures prices), resulting in profitable oil storage, the VLCC available in the market is basically running, some of which are floating on the sea as oil tanks, leading to soaring freight charges.

"This has been the case since April. The surge in freight rates directly consumed the discount of Middle East crude oil, which led to the fact that Chinese buyers actually did not enjoy more low price benefits." The central enterprises told reporters.

Second, the shortage of reserves. According to Wood Mackenzie analysis, this year is the end of the two phase of the national strategic repository. The three phase has not yet been formally put into operation. It is estimated that there will be no significant increase in reserves throughout the year. The utilization rate of China's energy storage facilities jumped from 72% at the end of last year to 83% in January and February this year, and is expected to remain above 90% throughout the year.

This means that China needs to adjust reserves to buy enough oil in the low oil price cycle and reduce the cost of production materials in the whole industry, which will be a challenge for China's crude oil reserve management department.

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