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Oil Forecast: OPEC+ Deal Dwarfed by Crude Oil Demand Woes

Oil Forecast: OPEC+ Deal Dwarfed by Crude Oil Demand Woes

Rich Dvorak, Analyst

CRUDE OIL, OIL PRICE NEWS & OIL FORECAST: OPEC+ DEAL, SAUDI ARABIA & RUSSIA PRODUCTION CUT AGREEMENT LIKELY NOT ENOUGH TO OFFSET SUPPLY GLUT

  • Oil price action whipsawed 7% higher only to close down 10% on Thursday as commodity traders digested the latest OPEC+ deal and FOMC news
  • Crude oil plunged 20% from intraday highs despite Saudi Arabia and Russia agreeing to end the oil price war by slashing production
  • The price of oil could remain under pressure despite announced OPEC+ supply cuts with global crude oil demand in freefall alongside GDP growth

Crude oil price action sent commodity traders on a rollercoaster ride Thursday amid the latest OPEC+ teleconference. The 7% gain recorded earlier in the session, perhaps amplified by a continuation of coronavirus optimism as well as the Fed’s huge loan program just announced, preceded a 20% crash in crude oil from its intraday high, which steered prices about 10% lower on balance.

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CRUDE OIL PRICE CHART: 15-MINUTE TIME FRAME (09 ARPRIL 2020 INTRADAY)

Crude Oil Price Chart OPEC+ Deal Saudi Arabia Russia Supply Cuts

Chart created by @RichDvorakFX with TradingView

OPEC and its allies agreed to slash crude oil production by 23% during May through June but stated supply cuts are expected to scale back gradually thereon. The OPEC+ deal looks to put a bottom in crude oil prices after crashing 70% earlier this year, initially sparked by economic fallout from the coronavirus pandemic, but was then exacerbated by the oil price war between Saudi Arabia and Russia.

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Saudi Arabia and Russia, the second and third largest crude oil producers in the world, decided end their differences agreed to scale back output to 8.5 million barrels per day. Prior to the latest OPEC+ deal, Saudi Arabia and Russia were producing over 10 million barrels per day each. As a whole, OPEC+ agreed to cut crude oil supply by a total of 10 million barrels per day.

CRUDE OIL PRICE CHART: MONTHLY TIME FRAME (AUGUST 2001 TO APRIL 2020)

Crude Oil Price Chart Oil Forecast OPEC+ Production Cuts

Chart created by @RichDvorakFX with TradingView

The proposed oil production cuts are expected to fall far short of the estimated collapse in crude oil demand, which has stemmed from the likely unavoidable recession and global coronavirus lockdown. This could explain bearish crude oil price action – a sharp decline of 20% in a matter of minutes – that ensued after details of the OPEC+ deal crossed the wires.

Oil - US Crude BEARISH
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Change in Longs Shorts OI
Daily 12% 10% 11%
Weekly 2% -5% -2%
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As such, there may be potential for crude oil to drop below $20, considering market supply and demand likely remain out of balance, even despite the OPEC+ deal. Also, as the economy struggles to match the consensus view of a ‘V-shape’ recovery, and unemployment spikes further, there could be another wave of risk aversion that adds to recent oil selling pressure. Correspondingly, the 2001 lows near the $17.00 price might come into focus if crude oil bears can make a push below the $20.00 handle.

-- Written by Rich Dvorak, Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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