Come Together

If OPEC Plus can iron out their differences, maybe there is hope for the rest of us. After some dancing around and some veiled threats from Saudi Arabia and Russia, OPEC cheaters promised to get their oil production under control and has set the stage for a weekend meeting.

Opec and the wider Opec+ group will both hold their ministerial meetings tomorrow via video conference at 7:00 am central time, and Opec+ will hold its meeting immediately after that at 9:00 central time. Saudi Arabia and Russia reportedly want to extend output cuts of 9.7 million barrels per day (bpd) into July and possibly until the end of the year. If OPEC fails to agree this weekend, the deal would revert back to 7.7 million barrels a day. That would add at least 2 million barrels a day of production and probably more because Saudi Arabia could stop over complying that would be like an increase of over 3 million barrels of oil a day. Yet because the meeting is scheduled, it is unlikely that the deal will fall apart. Let's face it, the oil production cut that was engineered in large part by President Trump has been very successful and has helped the global energy industry stabilize.

How successful has the oil cut been? Well, according to John Kemp at Reuters, the dated Brent crude oil five-week calendar spread drew close to level yesterday, signaling physical crude traders expect the tightest market since the original OPEC+ agreement broke down. So despite a lot of fear that the cut would do no good because of the coronavirus demand destruction, demand recovery in China, Europe, and the U.S. along with the cut, market forces are helping the market heal. If demand continues to recover and OPEC plus stick to their guns, the most significant coordinated production cut in history will soon be viewed as a smashing success.

Of course, it did not come without some real pain in the energy industry. And while we are seeing a recovery, the damage caused by the coronavirus shut-ins may have set the stage for oil shortages in the future. The pullback in investment will have ramifications for years to come. How bad? Well, according to the U.S. Energy Information Administration (EIA), global expenditures related to oil and natural gas exploration and development (E&D) increased $42 billion (13%) for 102 publicly traded oil companies in 2019, totaling $361 billion. As a result of significant crude oil price declines in 2020, however, global proved reserves will likely be revised downward, and oil and gas exploration and development (E&D) expenditures will also likely decline. Several companies have already announced large budget reductions.

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