The oil prices are currently enjoying some stability on June 16. These market conditions are dominant after pricing in worries of a new pandemic wave and the OPEC+ cuts agreement. According to Bjornar Tonhaugen, Rystad Energy’s Head of Oil Markets:
“In the last two weeks oil traders priced in two big ‘ifs’. How supply will evolve and the fear of the pandemic’s second wave. The former lifted prices to above US$40, while the realization of the later brought prices back to the more logical levels of between US$35 and US$40.”
The oil markets have now attained relative stability for the short term. Unless there is an abrupt shock in supply or demand that hits the market, any daily changes in pump prices are expected to remain marginal. That will create a dominant trading pattern as economies re-open after the coronavirus-related lockdowns.
Price rose slightly on June 16 but that was not due to a result of a significant market mover. In an environment that has endured a lot of depression for months now, when there is no news, stability always becomes good news.
Currently, a positive vibe has emerged that the oil markets have already priced in the fears of the second wave of COVID-19. With that done, the market needs some positivity. The modest gains enjoyed on June 16 are due to that mood.
The question that comes to everyone’s mind is; what happens next? Since the return of another wave of the pandemic is a high possibility, traders and investors wonder whether another round of global lockdowns will be initiated. They are also wondering whether travel restrictions will be imposed once more and industrial activity reduced.
If the world encounters another wave of the pandemic just as it happened in the first half of the year; demand reduction will happen again. The next round of lockdowns and demand reductions was not in the initial planning and it is likely to plunge the global economy into a crisis.
OPEC+ is fully aware of this possibility and its latest agreement to extend the deep production cuts is a positive indication for the market that a supply-reduction mechanism is already in place and might be triggered if the need arises. The investors and traders trust the policymakers this time around.
OPEC+ Meeting Coming Up
Currently, everyone is now focusing on the next round of OPEC+ meetings scheduled for June 18. That meeting’s production cut compliance committee briefing is not one to be missed. The meeting might not take any decisions on production cuts. However, it is expected to be very indicative of the mood existing within OPEC+.
It will show the patience to sub-compliance in reducing production; and also an indication of the way words translate in reality. It should not be surprising to see the prices move on news that some of the member nations have not been cutting as much as needed. There might be many takeaways from the meeting and it will be worth monitoring.
The reaction of Saudi Arabia and Russia will be the most notable indication of the atmosphere in the group. Although the panel is not immediately deciding on any action, the countries behind it may do it. What will keep the production cut agreement operational is patience, compliance, and trust among the member states. All of these factors are currently put to test.
If any of the nations increase their production or oppose the panel in any way, the oil prices might drop. However, if all the members are in agreement and comply with the set production cuts, the upside trend of the oil prices will continue.