The Commodities Feed: OPEC+ meeting

OPEC+ are set to meet today, and optimism around cuts is growing, with the Russians saying that they would be willing to cut by 1.6MMbbls/d. While this is around 15% of their total output and would be a meaningful cut, it would still be a struggle for the whole of OPEC+ to reach 10MMbbls/d, and therefore require the help of other oil producers if they are to get near this target. Furthermore, if the group does manage to agree on a 10MMbbls/d cut, while it would offer some short-term relief to the market, it would still not be enough to balance it over 2Q20. So it may not take too long for prices to come under pressure once again.

Another important factor to consider is the reference level for any cuts. Would they use the 1Q20 average, March output, or current levels? It would likely make sense for them to use current output, given that it would make the size of the cuts appear larger. Meanwhile, the duration of the deal will also be important, with sizeable cuts likely needed through to the end of the year in order to start drawing down the sizeable inventory build.

Finally, the EIA reported yesterday that US crude oil inventories grew by a record 15.2MMbbls over the last week, with refinery run rates falling by a further 6.7 percentage points to just 75.6%, lower than the levels seen during Hurricane Harvey in 2017, and the lowest utilisation rate seen since 2008. Despite this large reduction in refining activity, gasoline inventories still increased by 10.5MMbbls, with gasoline demand falling by 1.6MMbbls/d over the week to just 5.07MMbbls/d - the lowest level since the 1990s. This compares to around 9.8MMbbls/d for the same week last year. Despite a bearish report, the market still managed to settle higher on the day, with all attention on potential OPEC+ cuts.

While metal mine supply disruptions continue to rise, refined supply from China has improved throughout March, compared to the previous month. This partially reflects improved conditions for smelter operations with progress made in containing the Covid-19 outbreak in the country.

Despite being a lagging indicator, the supply of refined metal over the period has far outpaced demand leading to inventory builds, and this situation should last through April. However, the current expectation for April production is that there will be moderate declines. This is due to the fact that low prices have begun to discourage supply. As for copper, the spot treatment charges (TCs) have come under pressure recently with increased smelter operations and mine supply disruptions. This week, the spot TC declined to the same level as the annual benchmark of US$62.5/tonne. With recent mine disruptions from South America to the African copper belt eventually feeding into shipments, spot TCs will likely continue to come under pressure.