{"id":1009,"date":"2020-04-13T18:49:29","date_gmt":"2020-04-13T13:19:29","guid":{"rendered":"https:\/\/blog.tickertape.in\/?p=1009"},"modified":"2021-03-24T12:07:46","modified_gmt":"2021-03-24T06:37:46","slug":"oil-production-cut-triggers-and-consequences","status":"publish","type":"post","link":"https:\/\/www.tickertape.in\/blog\/oil-production-cut-triggers-and-consequences\/","title":{"rendered":"Oil production cut: triggers and consequences"},"content":{"rendered":"\n<p>In Feb this year, Paris-based International Energy Agency (IEA) had warned a decline in global demand for oil. As predicted, the demand for <a href=\"https:\/\/www.tickertape.in\/blog\/low-crude-oil-prices-reasons-and-effect-on-india\/\">crude oil<\/a> was hammered and the price fell by over 30% on 9th Mar 2020, the sharpest decline since the Gulf War of 1991. This development resulted in certain remarkable consequences.<\/p>\n\n\n\n<ul><li>Russia denied oil production cut<\/li><li>The OPEC deal became void<\/li><li>Saudi Arabia initiated oil price war<\/li><\/ul>\n\n\n\n<p>But now, the tables have turned. With this premise, let us zoom-in into the matter.<\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_66_1 counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title \" >Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/www.tickertape.in\/blog\/oil-production-cut-triggers-and-consequences\/#What-did-the-latest-OPEC-meeting-render\" title=\"What did the latest OPEC meeting render?\">What did the latest OPEC meeting render?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/www.tickertape.in\/blog\/oil-production-cut-triggers-and-consequences\/#Why-is-the-US-interested-in-oil-production-cut\" title=\"Why is the US interested in oil production cut?\">Why is the US interested in oil production cut?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.tickertape.in\/blog\/oil-production-cut-triggers-and-consequences\/#How-far-did-the-US-go-to-broker-the-oil-production-deal\" title=\"How far did the US go to broker the oil production deal?\">How far did the US go to broker the oil production deal?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/www.tickertape.in\/blog\/oil-production-cut-triggers-and-consequences\/#The-smart-Mexican-hedge-plan\" title=\"The smart Mexican hedge plan\">The smart Mexican hedge plan<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/www.tickertape.in\/blog\/oil-production-cut-triggers-and-consequences\/#What-triggered-the-oil-price-war\" title=\"What triggered the oil price war?\">What triggered the oil price war?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/www.tickertape.in\/blog\/oil-production-cut-triggers-and-consequences\/#Why-was-Saudi-Arabia-looking-to-cut-oil-production\" title=\"Why was Saudi Arabia looking to cut oil production?\">Why was Saudi Arabia looking to cut oil production?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/www.tickertape.in\/blog\/oil-production-cut-triggers-and-consequences\/#Was-this-any-good-to-India\" title=\"Was this any good to India?\">Was this any good to India?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/www.tickertape.in\/blog\/oil-production-cut-triggers-and-consequences\/#How-would-the-agreement-to-cut-oil-production-affect-India\" title=\"How would the agreement to cut oil production affect India?\">How would the agreement to cut oil production affect India?<\/a><\/li><\/ul><\/nav><\/div>\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What-did-the-latest-OPEC-meeting-render\"><\/span><strong>What did the latest <\/strong><strong>OPEC meeting<\/strong><strong> render?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>The demand for oil across the globe is estimated to have declined by ~30 million barrels per day (bpd) with over 3 billion people locked down due to the COVID-19 outbreak. Further, UBS and Goldman Sachs forecasted that Brent prices would nose-dive to $20 per barrel because oil output cut alone may not be enough to address the slack in oil demand.<\/p>\n\n\n\n<p>On Sunday, the 12<sup>th<\/sup> April 2020, after four days of delay and mulling over, the OPEC meeting finally bore fruits. The OPEC members and non-OPEC members led by Russia finally agreed to cut crude oil production. The oil-producing countries have agreed to cut production for May and June by 9.7 bpd, which translates to ~10% of global supply. Further, the total global supply could be ~20 million bpd (20% of global supply).<\/p>\n\n\n\n<p>Notably, this cut in the oil production is over 4 times deeper than the last record cut of 2008. While the curbs on oil production are expected to be gradually relaxed after June, these are here to stay until Apr 2022. A special mention in the oil output cut goes to the US and its President Donald Trump, who pushed the OPEC countries and non-OPEC countries to take the step so as to curb the decline in the oil price.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Why-is-the-US-interested-in-oil-production-cut\"><\/span><strong>Why is the US interested in <\/strong><strong>oil production cut<\/strong><strong>?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>The deadly novel coronavirus has not only challenged the health of people but also the well-being of economies across the globe. As such, countries are doing what they can to curb the spread of the deadly novel coronavirus. Same goes with the US.<\/p>\n\n\n\n<p>However, the measures to curb the spread of COVID-19 challenged the economy on many fronts. A hammered demand for fuel and significantly low prices of oil pressurised the budgets of shale oil producers and threatened the domestic oil industry. This is mainly because oil-producing companies incur heavy costs in the production of shale oil. Naturally, the US is looking to protect its oil industry from extremely low prices, which would threaten its domestic industry.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"How-far-did-the-US-go-to-broker-the-oil-production-deal\"><\/span><strong>How far did the US go to broker the oil production deal?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Besides agreeing to cut its share of oil output, the US also volunteered\nto downsize its production by an additional 2,50,000 bpd on behalf of Mexico.\nOf course, the US made it very clear that it would like to be compensated in\nthe near future but didn\u2019t mention how. Why this strategic suggestion from the\nUS? Because Mexico, which was supposed to cut 4,00,000 bpd, refused to strike\nthe OPEC deal and America, who brokered the deal, just can\u2019t let its efforts go\nto waste. For more context, here\u2019s what\u2019s cooking behind the scenes.<\/p>\n\n\n\n<p>Mexican government owns Pemex, an oil-producing company, which is the\nbackbone of its economy. Therefore, cutting oil production means bad news for\nMexico. Especially because all is not well with Pemex. The state-run\noil-producing company has to its credit a debt of $100 billion and a decline in\nproduction for 15 years now among other woes.<\/p>\n\n\n\n<p>Nonetheless, Mexico offered to start cutting output by up to 1,00,000\nbpd immediately. However, Saudi Arabia refused to take it fearing other countries\nwould follow suit and make counteroffers, which make things worse. But it very\nclear that Mexico can\u2019t afford production cut. Then why did it even make such a\ncounteroffer in the first place? Well, we can just that Mexico has a trick or\ntwo up its sleeves.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"The-smart-Mexican-hedge-plan\"><\/span><strong>The smart Mexican hedge plan<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Well, genius is in preparing for worse and the Mexican government did\njust that. Each year, it buys put options worth billion dollars. These are\ncontracts that that come in handy when oil prices hit rock bottom. These contracts\ngive Mexico a right to sell oil at a pre-decided price within a predetermined\nduration. So should the oil prices fall below the predetermined level, Mexico\ncan exercise its right and sell oil without incurring ugly losses.<\/p>\n\n\n\n<p>Now let us get to the roots of the matter. What ensued production cut\nproposal and oil price war?<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What-triggered-the-oil-price-war\"><\/span><strong>What triggered the oil price war?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Saudi Arabia, a member of the Organization of the Petroleum Exporting Countries (OPEC) had demanded Russia, a non-OPEC member to cut production of crude oil due to increased production of American shale oil and escalating concerns over COVID-19. However, the OPEC failed to strike a deal with the non-OPEC after Russia denied Saudi Arabia\u2019s demand. To this, Saudi Arabia responded by flooding the market with low-cost crude oil, which triggered a steep fall in the oil price level. Worse, it initiated an oil price war.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Why-was-Saudi-Arabia-looking-to-cut-oil-production\"><\/span><strong>Why was Saudi Arabia looking to cut <\/strong><strong>oil production<\/strong><strong>?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>In Sep 2016, Saudi Arabia (an OPEC member) and Russia (a non-OPEC member) had agreed to cooperate and manage oil prices. This was essential to protect the economies of both oil-producing and purchasing countries from severe price <a href=\"https:\/\/www.tickertape.in\/blog\/volatility\/\">volatility<\/a>. Fast forward to now when COVID-19 has dampened the global demand for oil and triggered price reductions. This has resulted in losses for the oil-producing countries.<\/p>\n\n\n\n<p>Since OPEC\u2019s main objective to address such dire situations, the member nations had proposed the production cut, which would curb overproduction of oil and control the prices. But with Russia\u2019s denial to agree, the OPEC deal to cooperate and manage oil prices became void and triggered an oil price war.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Was-this-any-good-to-India\"><\/span><strong>Was this any good to India?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>India is the world\u2019s 3rd largest crude oil and 4th largest liquefied natural gas importer and imports ~80% of its crude oil needs. Every $ rise in the price of oil inflates our annual import bill and adds ~Rs 11,482cr to it. This results in a balance of payments and a lower value of the rupee. On the micro-level, fuel-dependent companies would transfer higher costs to end consumers and push inflation. With this premise in mind, let us delve into the matter.<\/p>\n\n\n\n<p>The oil price war seemed to have brought good news to India, mainly because our major demand for oil is met via imports. Sample this, every $ drop in the price of a barrel of crude oil cuts India\u2019s oil import bill by Rs 10,700cr annually. Further, every $10 reduction in the price of crude oil helps us save $15bn or 0.5% of GDP.<\/p>\n\n\n\n<p>Given a massive current account deficit, fiscal deficit, and skyrocketing inflation, and not to forget a falling GDP, the oil price war would benefit India on many fronts. But the real benefit of oil price cut would only be seen if at all the government passes on the benefits to the end consumers.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"How-would-the-agreement-to-cut-oil-production-affect-India\"><\/span><strong>How would the agreement to cut oil production affect India?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>As mentioned, India imports the majority of its crude oil demand, which means our import bills are sensitive to high oil prices. The recent agreement to cut oil production has worked like a charm and on Monday, the 13<sup>th<\/sup> Apr, oil prices rallied over ~$1 a barrel. This will naturally add to our import bills and would also increase the consumer\u2019s expenses. Also, India is considering to buy the <a href=\"https:\/\/www.tickertape.in\/blog\/commodity-in-economy\/\">commodity<\/a> to replenish oil reserves.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Crude oil prices shot by $1 after the OPEC and non-OPEC members agreed to oil production cuts. Read what delayed the agreement and what it means to India<\/p>\n","protected":false},"author":27,"featured_media":1012,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"_lmt_disableupdate":"","_lmt_disable":"","footnotes":""},"categories":[10,1744],"tags":[],"acf":[],"modified_by":"Manonmayi","jetpack_featured_media_url":"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2020\/04\/OPEC.jpg?wsr","_links":{"self":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/1009"}],"collection":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/users\/27"}],"replies":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/comments?post=1009"}],"version-history":[{"count":4,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/1009\/revisions"}],"predecessor-version":[{"id":1016,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/1009\/revisions\/1016"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/media\/1012"}],"wp:attachment":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/media?parent=1009"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/categories?post=1009"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/tags?post=1009"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}