OPEC+ seems to be agreeing on a deal today to cut output by at least 10 million bpd!

What that means for the market? Rystad Energy’s Oil Markets team comments below:

If true, the preliminary production cut of 10 million bpd among OPEC+ members is a good first step, but it would still not be enough given the 20 million bpd+ supply overhang expected for 2Q20. If tomorrow OPEC++ fails to secure additional engagements to further curve production, the 10 million bpd figure alone would not make a material difference or reverse the deep contango curve of Brent prices in a meaningful or lasting way. However, it could save global E&P producers from a large number of forced production shut-ins over the next couple of months, buying the currently broken oil market precious needed time to adjust to “the new normal”.

If pre-April level is used for Saudi Arabia as a reference point before the cut, 10 million bpd cut might be enough for most producers to survive through the second quarter of 2020. We will not hit the storage wall at least. But that is only the case if cuts are implemented within a matter of days rather than weeks, which is unlikely to be the case in practice.

That said, total oil cuts amounting to 20 million bpd would be exactly what the market needs to see a balance for crude supply and demand over the next 2-3 months as refiners are aligning with 27 million drops in oil products consumption in April due to the global lockdown. Such a deal would make sure that we once and for all avoid that crude storage reaches the physical limits, which would happen within 40 days without any cuts by producers. If crude storage were to reach physical limits we can expect crude prices to dive into a deep abyss.

But even if the deal is of 10-15 million bpd, that leaves more time for the industry to prepare. A 20 million bpd cut-case, however, would be a guarantee that the worst imaginable market collapse is to be avoided.