The OPEC+ nations has finally reached an agreement to cut oil production by 9.7 mbbls/day for the May - June period in its urgent Sunday meeting, after four days in limbo. The Group, which had its first meeting on Thursday, initially proposed a cut of 10 mbbls/day but left the deal unresolved due to Mexico's insistence on delivering cuts of only 100k bbls/day against 400k bbls/day cuts required under the arrangement. Meanwhile, talks with the G20 energy ministers on Friday concluded that the Group is willing to cooperate for oil market stability but did not pledge a specific level of additional cuts. With this deal, we foresee the target cuts of 10 - 15 mbbls/day as almost achieved with the assumption of US "organically" reducing its output, as suggested, together with participation by some other countries. While conditions are seemingly positive on the supply side given the end of the Saudi - Russia price war, as well as the new deal on output cuts, impact of the Covid-19 global pandemic on demand is even worse and remains uncertain, hence supply - demand dynamics likely to take a longer time to rebalance. As such, we maintain our Neutral stance on the sector with expectation that oil prices will remain volatile.

• A dramatic OPEC+ deal talks. The OPEC+ nations which include major producers like Saudi Arabia and Russia had their first emergency meeting on Thursday, proposing a cut of 10 mbbls/day across the May - June period. While the agreement was met by strong objections initially from some of producers such as Kazakhstan and Brunei, Mexico was the sole dissenter, insisting on only delivering cuts of 100k bbls/day against 400k bbls/day required under the arrangement which requires all participants to reduce production by 23%. Although delegates from other OPEC+ had expressed willingness to proceed, with the US committing 250k bbls/day on Mexico’s behalf, it is understood that Saudi Arabia had insisted on full participation. The OPEC+ output cut agreement was therefore left in limbo with no deal until it called an urgent Sunday meeting which saw the Group compromise with Mexico to finalize the deal with a cut of 9.7 mbbls/day for the May - June period. The proposed agreement also plots out 8 mbbls/day cuts until end of 2020 and 6 mbbls/day cuts through April 2022. The win-win deal between Saudi Arabia and Russia is not a total surprise as they have worked together for 3 years to maintain the supply - demand balance before the deal collapsed recently. Compliance will be key however given the lack of discipline by Russia and its allies during that period.

• G20 - to cooperate but no specific numbers. The talks within G20 energy ministers on Friday concluded that the Group is willing to cooperate for oil market stability but did not pledge a specific level of additional cuts. Earlier, OPEC+ had hoped the G20 would be willing to pledge a cut of an additional 5 mbbls/day particularly from the US, Canada, the UK and other producers not allied with the cartel. The meeting was a disappointment however with no numbers specifically mentioned. This has given rise to the issue of commitment by the participating members while taking advantage on others' reduction. Nevertheless, we note that the Group will keep monitoring the production level by the participating countries to prevent any additions into the market.

Source: PublicInvest Research - 13 Apr 2020