BAKU, Azerbaijan, Nov.4
By Leman Zeynalova - Trend:
Oil market has grown dependent on OPEC measures, Trend reports with reference to Fitch Solutions Macro Research (a unit of Fitch Group).
“While we believe that deeper cuts are unlikely at this stage, we also see no scope for the deal to be unwound in 2020. In our view, the group now faces ‘the central bankers ’ dilemma’: temporary policy measures that were enacted in support of the market have proved stickier than was first intended, the market has grown dependent on these policies and now attempts to reverse them are met with bouts of renewed price volatility, stoking fears of broader market destabilization,” reads a report from Fitch Solutions.
The company believes that the more cuts that OPEC makes, the more cuts that the market demands and the more difficult it becomes to walk back on the policy further down the line.
“A sharp slowdown in US shale growth, combined with the aftershock from years of underinvestment in supply during the downturn, should provide a window for the barrels’ return in the early-to-mid 2020s. But whether this window will be large enough to accommodate both the return of barrels from the product cut agreement and the 2 million b/d currently shut in from Iran is highly questionable and would likely demand stronger consumption growth than we currently forecast,” reads the report.
One final point worth making on the deal is that the group would typically cut its output in response to a recession, when demand and prices plummet, according to the company.
The more deeply they cut while the global economy is still expanding, the less dry power they have left, if it begins to contract, said Fitch Solutions.
“While the cuts that have been made since 20 17 are not quite as deep as those that were made during the global financial crisis, they are not far off. And, perhaps more significantly, they look to be longer lasting. The cuts made in 2008 bottomed out after eight months and began to recover from there. We are 34 months into the current round of cuts and it is as yet unclear whether the bottom has been reached. This could have implications not only for depth of decline in oil prices during the next recession, but also the pace of recovery,” said the report.
The major loss of supply outside of the cut deal stemmed from Venezuela and Iran, which saw production drop by around 500,000 b/d and 600,000 b/d, respectively, in the nine months to September, said the company.
“US sanctions have been the main catalyst for the cuts, as a dearth of international buyers forced the s hut-in of exports and then output. It is unlikely that the sanctions on Venezuela will be lifted while President Maduro remains in power, but there is significant scope for regime change over the coming months.”
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