skip navigation
Blog

Stay up to date on timely topics and market events. Subscribe to our Blog now.

MARKETS
16 April 2020

Oil Market Update

By J. Gibson Cooper, René Ledis

Stay up to date on timely topics and market events. Subscribe to our Blog now.

Over the weekend, OPEC+ finally reached a production cut agreement after Mexico initially held out and caused some nervous moments. Specifically, the agreement runs through 2022 and defines staggered production cuts, as follows:

  • May 1, 2020 to June 30, 2020: Cut approximately 9.7 million barrels/day of production (just shy of the 10 million barrels/day discussed previously)
  • July 1, 2020 to December 31, 2020: Cut approximately 7.6 million barrels/day
  • January 1, 2021 to April 30, 2022: Cut approximately 6.0 million barrels/day

The agreement officially ends the price war initiated by Saudi Arabia in March. The agreed production cuts were not contingent upon any other cuts from non-OPEC sources. Furthermore, OPEC+ has committed to reconvene on June 10 to review if additional production restraint is necessary, and on December 21 to review if a further extension is required. In addition, the US, Canada and Brazil agreed to reduce output by 3.7 million barrels/day through market-based mechanisms rather than voluntary cuts. Industry watchers believe the reductions will come from North America, as follows: US shale production cutting approximately 1.5 million to 2.0 million barrels/day; Canadian Oil Sands, 1.5 million barrels/day; Heavy Oil, 500,000 barrels/day; and Deepwater, 300,000 barrels/day.

These reductions have already begun with approximately 1.8 million barrels/day in production likely to come off in May 2020. Voluntary company shut-ins are already occurring. Additionally, the key oil-producing states of Texas and Oklahoma are debating the merits of mandated company production proration, although we believe this would be difficult to implement. Nonetheless, these global efforts are welcome, as the level of demand destruction related to the COVID-19 pandemic is unprecedented and the pace of the return in demand remains unknown.

What Are the Implications of the OPEC+ Agreement?

This agreement has provided some stabilization to the market and we believe it should reduce volatility in the process. In the immediate term, the production cuts, while a noble effort to avoid storage “tank tops,” may not be enough given the aforementioned oil demand destruction. Refinery demand for crude is still decreasing, creating some logistical bottlenecks. The market remains concerned over the near-term supply/demand imbalance as can be seen in the lower near month oil price relative to longer-dated futures prices, while local oil prices in many US basins are trading at more severe discounts to West Texas Intermediate (WTI) crude prices.

Exhibit 1: Oil Flips but Market Forecasts Will Recover
Explore Oil Flips but Market Forecasts Will Recover.
Source: Bloomberg. As of 14 Apr 20. Select the image to expand the view.

We believe 2Q20 crude oil prices will remain volatile and subject to further downside given storage risks, although the OPEC+ agreement should provide some near-term floor. Recent data on declining US shale production remains an encouraging sign for future rebalancing. However, given the longer-term intention of the agreement, the potential to reduce inventories later in 2020 and into 2021 has set the stage for stronger future pricing (but remains subject to the timing and pace of demand returning). Additionally, we view the announced duration of the production cut (through 2022) positively as the agreement suggests the OPEC+ group’s understanding that further support may be necessary should the virus again impact economic activity later in 2020.

© Western Asset Management Company, LLC 2024. The information contained in these materials ("the materials") is intended for the exclusive use of the designated recipient ("the recipient"). This information is proprietary and confidential and may contain commercially sensitive information, and may not be copied, reproduced or republished, in whole or in part, without the prior written consent of Western Asset Management Company ("Western Asset").
Past performance does not predict future returns. These materials should not be deemed to be a prediction or projection of future performance. These materials are intended for investment professionals including professional clients, eligible counterparties, and qualified investors only.
These materials have been produced for illustrative and informational purposes only. These materials contain Western Asset's opinions and beliefs as of the date designated on the materials; these views are subject to change and may not reflect real-time market developments and investment views.
Third party data may be used throughout the materials, and this data is believed to be accurate to the best of Western Asset's knowledge at the time of publication, but cannot be guaranteed. These materials may also contain strategy or product awards or rankings from independent third parties or industry publications which are based on unbiased quantitative and/or qualitative information determined independently by each third party or publication. In some cases, Western Asset may subscribe to these third party's standard industry services or publications. These standard subscriptions and services are available to all asset managers and do not influence rankings or awards in any way.
Investment strategies or products discussed herein may involve a high degree of risk, including the loss of some or all capital. Investments in any products or strategies described in these materials may be volatile, and investors should have the financial ability and willingness to accept such risks.
Unless otherwise noted, investment performance contained in these materials is reflective of a strategy composite. All other strategy data and information included in these materials reflects a representative portfolio which is an account in the composite that Western Asset believes most closely reflects the current portfolio management style of the strategy. Performance is not a consideration in the selection of the representative portfolio. The characteristics of the representative portfolio shown may differ from other accounts in the composite. Information regarding the representative portfolio and the other accounts in the composite are available upon request. Statements in these materials should not be considered investment advice. References, either general or specific, to securities and/or issuers in the materials are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendation to purchase or sell such securities. Employees and/or clients of Western Asset may have a position in the securities or issuers mentioned.
These materials are not intended to provide, and should not be relied on for, accounting, legal, tax, investment or other advice. The recipient should consult its own counsel, accountant, investment, tax, and any other advisers for this advice, including economic risks and merits, related to making an investment with Western Asset. The recipient is responsible for observing the applicable laws and regulations of their country of residence.
Founded in 1971, Western Asset Management Company is a global fixed-income investment manager with offices in Pasadena, New York, London, Singapore, Tokyo, Melbourne, São Paulo, Hong Kong, and Zürich. Western Asset is a wholly owned subsidiary of Franklin Resources, Inc. but operates autonomously. Western Asset is comprised of six legal entities across the globe, each with distinct regional registrations: Western Asset Management Company, LLC, a registered Investment Adviser with the Securities and Exchange Commission; Western Asset Management Company Distribuidora de Títulos e Valores Mobiliários Limitada is authorized and regulated by Comissão de Valores Mobiliários and Brazilian Central Bank; Western Asset Management Company Pty Ltd ABN 41 117 767 923 is the holder of the Australian Financial Services License 303160; Western Asset Management Company Pte. Ltd. Co. Reg. No. 200007692R is a holder of a Capital Markets Services License for fund management and regulated by the Monetary Authority of Singapore; Western Asset Management Company Ltd, a registered Financial Instruments Business Operator and regulated by the Financial Services Agency of Japan; and Western Asset Management Company Limited is authorised and regulated by the Financial Conduct Authority ("FCA") (FRN 145930). This communication is intended for distribution to Professional Clients only if deemed to be a financial promotion in the UK as defined by the FCA. This communication may also be intended for certain EEA countries where Western Asset has been granted permission to do so. For the current list of the approved EEA countries please contact Western Asset at +44 (0)20 7422 3000.