(Dong Xiucheng) "OPEC+" reached a preliminary production reduction agreement, but the issue of low oil prices still needs to be paid attention to

(Source: "Shanghai Securities News" 2020-04-11)

On the evening of the 10th, Beijing time, Mexico agreed to temporarily reduce production and supported the "OPEC+" production reduction agreement. At this point, the "OPEC+" oil-producing countries have reached a preliminary agreement on production cuts. However, the industry said that the production reduction in the preliminary agreement is not enough to solve the imbalance between supply and demand in the crude oil market, and low oil prices and the series of problems they bring have still not been resolved.

The preliminary agreement is that "OPEC+" member countries will reduce production by 10 million barrels per day from May 1 this year, and this production reduction will last until the end of June; in addition, they will reduce production by 8 million barrels per day from July this year until the end of December; and from January 2021, they will reduce production by 6 million barrels per day until April 30, 2022.

The negotiation process of this preliminary agreement was not smooth. Previously, Mexico withdrew from the meeting because it did not accept the production reduction. Mexican Energy Minister Garcia also stated on Twitter that Mexico could only reduce production by 100,000 barrels per day, but "OPEC+" required it to reduce production by 400,000 barrels per day. According to the "OPEC+" statement, the production reduction agreement of 10 million barrels per day can only be implemented if Mexico agrees to reduce its share of production.

On the evening of the 10th, Beijing time, Mexico expressed its support for the "OPEC+" production reduction agreement and agreed to temporarily reduce production. At this point, the "OPEC+" production reduction agreement has been initially reached.

Dong Xiucheng, a professor at the National Institute for Opening-up at the w88 casino, told a reporter from the Shanghai Securities News that Mexico is a country that relies heavily on crude oil for its economy, so it is more concerned about it. But he believes that the key to whether the production reduction agreement can be reached is still the struggle between Saudi Arabia, Russia and the United States.

This crude oil price war began on March 8. The purpose of "OPEC" and Russia is to regain the market share occupied by U.S. shale oil production in recent years.

Dong Xiucheng analyzed that Saudi Arabia and Russia hope that the United States can join in reducing production, but from a legal perspective in the United States, it is unlikely that the U.S. federal government will force companies to reduce production from a government perspective.

After the initial production reduction agreement is reached, the implementation of the production reduction by all parties and the subsequent rebound in oil prices still deserve attention.

"Historically, OPEC, the official organization, has low credibility in the implementation of production cuts, coupled with the lack of supervision mechanisms and the inherent shortcomings of the informal organization mechanism of 'OPEC+'." Dong Xiucheng said.

In addition, the market believes that the 10 million barrel production reduction achieved by "OPEC+" is still not enough to balance market supply and demand, and international oil prices are unlikely to rebound significantly.

Dong Xiucheng said that this year’s global crude oil consumption demand has dropped by about 20%, while the production reduction has only been about 10%, and crude oil supply and demand have not returned to balance. After the production reduction agreement is reached, he expects U.S. light crude oil futures prices to rise to between US$30 and US$40 per barrel, but this will not solve a series of problems caused by low oil prices.

Due to the closure of European and American markets, international oil prices were suspended from trading on the 10th. The domestic crude oil market fell sharply. As of the close on the 10th, the price of Shanghai crude oil for delivery in May fell by 3.4%, and fuel oil closed down by nearly 2%.

On the 9th, international oil prices closed sharply. The price of light crude oil futures for May delivery on the New York Stock Exchange fell 9.29% that day to close at $22.76 per barrel. London Brent crude oil futures for June delivery fell 4.14% to close at $31.48 a barrel.

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