Oil Prices Bounce Back After Production Cut Discussions
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Oil Prices Bounce Back After Production Cut Discussions

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Peter Appleby By Peter Appleby | Journalist and Industry Analyst - Thu, 04/02/2020 - 19:38

Oil prices rebounded strongly today following positive signals between Russia and Saudi Arabia, the two principal participants in the price war that has caused chaos for the industry over the last month.

West Texas Intermediate crude climbed 35 percent to hit a price of US$25.93 on Thursday morning. Brent Crude rose almost 45 percent and momentarily reached US$32.02 Thursday morning after closing Wednesday at US$26.39. It has been stable for the majority of the day comfortably above US$29.

The response came following a tweet from US President Donald Trump in which he explained that he had spoken to Mohammed bin Salman, the Crown Prince of Saudi Arabia, who had spoken to President Vladimir Putin of Russia. According to the US president, the two countries agreed to cut back production by approximately 10MMboe. Trump followed with another tweet, saying “…Could be as high as 15 Million Barrels. Good (GREAT) news for everyone!”

Saudi Arabia’s Arab News today reported that Saudi Arabia has called an urgent meeting of OPEC nations to restore the “desired balance” of the world’s energy markets.

Earlier this month, both Russia and Saudi Arabia had promised to flood the market with tens of millions of barrels of extra production after talks between OPEC+ nations on how to reduce their production had stalled. The two countries, among the top three oil producers in the world, began a tit-for-tat process that also saw Saudi Arabia offer drastic discounts to markets in Asia, Europe and the US. This led to the price collapse that has led to operators around the world reducing CAPEX budgets for 2020 and beyond. The measures that many of the world’s largest oil consuming countries have taken, including China and India, has seen a sharp drop in reduction, with Rystad Energy suggesting demand will decrease by 2.2 billion boe in 2020 alone.

Among the worst hit mixes was the Mexican Crude Basket as its price fell from US$59.35 on January 6 of this year to US$10.61 as of yesterday.

There has been no immediate recovery for the Mexican basket, losing 1.39 percent of its value today, but the federal government will be hoping to see a response soon. Last week, Standard & Poor’s reduced PEMEX’s credit rating stating that the depressed prices will make it impossible for the company to meet its debt payments without support from the federal government.

On Thursday, El Financiero reported comments made by President Andrés Manuel López Obrador that set out the administration’s plan to increase the country’s refining capacity by 400Mb/d. The plan follows the 12-month refining low in February 2020. The president said that “we are going to allocate as much crude as we can to refining so as not to waste it.”

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