OPEC is back to supply controls, but will it be effective
The OPEC meeting on December 06th and 07th finally agreed upon the quantum of supply cuts. The total supply cut would be to the tune of 1.20 million bpd. Out of the cut, OPEC would contribute 8 lakh barrels while Russia, Mexico and other would contribute 40 lakh barrels. This is higher than the 1 million bpd originally estimated. What would be the impact of this move?
Price impact was visible
In the immediate aftermath of the move, the price of Brent crude shot up by 6%. The demand for crude has crossed 100 million bpd for the first time and this move to cut production by 1.2 million bpd should be instrumental in limiting the price damage from current levels. What this does to their relations with the US remains to be seen but for now the demand gap over supply of crude will be reinforced. The price damage may have been averted but it remains to be seen if prices sustain.
Demand could hold the key
The real concern would be whether the demand would hold. Currently, the demand for oil is high due to winter demand, which normally leads to strong heating oil demand from Europe and the US. The bigger concern would be the likely slowdown. The trade truce between the US and China may have hit a roadblock after the recent arrest of the Huawei CFO. Trade wars have been definitely doing the damage in China as it has been leading to a fall in consumer demand. Auto stocks worldwide have been under pressure due to higher oil prices and that could impact the price of oil. Also, if the trade war leads to a growth slowdown by 30-40 bps, as estimated by the IMF, then the impact on oil demand could be quite acute. Crude demand could also go down due to higher ethanol blending by countries like India. If demand peters, supply cuts may not really be effective. A lot would depend on post-winter demand!
