Immediately after a sharp runup in crude, a drop appears to have puzzled some. The drop in crude appears to be largely on the back of a moderation in the earlier run-up in price. Heres a quick backdrop on the entire issue. During the pandemic, the OPEC+ countries...(1/12)
...agreed to production cuts that would span a broad 2Y period of May'20 to Apr'22. This was to keep crude prices from collapsing on the back of a sharp drop in demand caused by the pandemic. The production cuts peaked to around 10.3mn barrels per day (mbpd) in June'20,...(2/12)
...coinciding with the peak of COVID-19 globally. In Jul'20, it was agreed to taper the production cuts to 7.5mbps till Apr'21, as demand started picking up. All of this went broadly as per plan. In Apr'21 it was decided that the production cuts would be tapered...(3/12)
...further in a gradual fashion over the months of May/Jun/Jul'21 to 5.4mbpd by end-July. In the recent OPEC+ meeting, it was agreed that this production cut of 5.4mbpd would further be eased to 3.4mbpd by Dec'21 and would continue at this level till Apr'22. The OPEC+...(4/12)
...countries are on page with this broadly. Then what is all the noise about? The OPEC+ members (with the exception of UAE) want these production cuts to continue till Dec'22 and not end abruptly in Apr'22. While the countries may agree to taper it further from 3.4mbpd...(5/12) almost nothing by end-Dec'22, the countries feel that in principle, they need to have an upper hand with the market narrative around OPEC+ controlling supply. The UAE is broadly acceptable to this as well. Then where is the disagreement? Before that, we need a...(6/12)
...rewind to early March this year where Russia was given a relaxation on its output cuts and was allowed to produce more. This was because higher crude prices strengthen the Rouble and Russia was trying to avoid this; as its export revenues were taking a hit. In short,...(7/12)
...they wanted a weaker and not a stronger Rouble as a weaker Rouble would help their exports. Therefore, the OPEC gave Russia a relaxation on its production cuts. UAE now wants the same and is blocking the extension of output cuts till they are given a similar...(8/12)
...relaxation. As long as they get their relaxation, the UAE is fine with the extension of cuts by the OPEC+ till end-Dec. Now for the market reaction. When the OPEC+ meeting was postponed, the markets assumed that production cuts would not get tapered post July and...(9/12)
...therefore there was an over-reaction. This appears to have broadly corrected itself. The market chatter now appears to place a high probability of the OPEC giving a relaxation to the UAE. It is important to note here in all of this that while higher crude prices...(10/12)
...are good for the OPEC, the cartel is also aware of how it was this very elevated price of crude that helped the development of alternate fuels like shale. Note here that while Russia's fiscal break-even rate is around $40/bbl, Saudi Arabia's is higher at $70/bbl and...(11/12)
...the OPEC as a whole is at $75/bbl. This would help one get some perspective on the sustainable level of crude prices into the near future. (12/12)
Thanks to Dayanand Mittal of JMF for a brilliant teach-in on the issue.

• • •

Missing some Tweet in this thread? You can try to force a refresh

Keep Current with Arjun G Nagarajan

Arjun G Nagarajan Profile picture

Stay in touch and get notified when new unrolls are available from this author!

Read all threads

This Thread may be Removed Anytime!


Twitter may remove this content at anytime! Save it as PDF for later use!

Try unrolling a thread yourself!

how to unroll video
  1. Follow @ThreadReaderApp to mention us!

  2. From a Twitter thread mention us with a keyword "unroll"
@threadreaderapp unroll

Practice here first or read more on our help page!

More from @arjungn80

6 Jul
We need to learn to live with COVID-19 and its variants. This appears to be what bellweather economies seem to be saying. While we are all aware of the US opening up, almost entirely in July, Singapore, and UK stand out in particular. Singapore is moving away from a...(1/7)
...“Covid-Zero” strategy of completely stamping out the virus from its country through strong border controls/aggressive contact tracing/social distancing. Singapore is now moving to a strategy that focussess on reopening its economy through mass-vaccinations with...(2/7)
...a broad assumption that COVID-19 would not completely exit the country for the next few years. Singapore also senses that it is falling behind its western counterparts on the recovery trajectory. It plans to live with the virus that would be contained through...(3/7)
Read 7 tweets
5 Jul
India and its oil-dynamics. We spoke last week about the two key known unknowns that the global and domestic markets were closely tracking. This week, we take a look at India's oil dynamics. Before we get to the specifics, it is very important to note here that a rise in...(1/9)
...oil prices in itself does not matter. It is why they rise that is of more importance. If the increase in oil prices is because of an increase in demand, then it remains a positive. This is because like a rising tide lifts all boats, the increase in oil prices...(2/9)
...(in this scenario) is a result of growing demand globally and domestically. It is because of this that the secular rise in oil prices to $76 in 2007 from $23 in 2003 was not seen to have any negative macro stability implications. However, if the rise in prices is on...(3/9)
Read 9 tweets

Did Thread Reader help you today?

Support us! We are indie developers!

This site is made by just two indie developers on a laptop doing marketing, support and development! Read more about the story.

Become a Premium Member ($3/month or $30/year) and get exclusive features!

Become Premium

Too expensive? Make a small donation by buying us coffee ($5) or help with server cost ($10)

Donate via Paypal Become our Patreon

Thank you for your support!

Follow Us on Twitter!