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Exchange Rates 02.06.2020 analysis

The production cuts introduced by OPEC greatly helped the oil markets to recover from the quarantine crisis. However, the massive supply glut that accumulated during the pandemic creates a new problem in the oil industry.

The accumulation of oil reserves should have ended by the OPEC meeting in June. The significant production cuts, along with a recovery in demand, ought to bring balance into the market.

However, according to some analysts, the excess supply is so large that the next movement of OPEC should be the removal of the surplus, which will be quite a huge obstacle for the organization.

"Even if OPEC further increases the production cuts and restore oil demand to reverse the process of increasing reserves, it will take almost a year to recover".said Harry Tchilinguirian of BNP Paribas

According to consultants at Rystad Energy, global supplies exceeded demand at an average of about 5.5 million barrels per day at the beginning of 2020, which resulted in stocks growing by nearly 1 billion barrels.

Bloomberg, using IEA data, calculates that if half of the tank with billions of barrels fall into the tanks of industrialized countries, which account for about 50% of world oil consumption, the reserves will easily surpass the record 3.13 billion barrels reached in 2016.

But according to Ed Morse of Citigroup, the most important factor in recovering the oil markets is not the overall level of stocks, but how fast it is changing. During the previous recession in 1998-1999, prices recovered when inventory growth began to slow down.

The OPEC + members will decide on June 9 and 10 whether to continue the production cuts, which currently amount to about 11 million barrels of daily production, or about 11% of the global supply, or to ease it in July, as originally expected.

Moscow wants to ease the production cut, but this may not be approved by OPEC +.

*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.

Performed by Andrey Shevchenko,
Analytical expert
InstaForex Group © 2007-2020
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