The time for cardiac arrest has passed, OPEC+introduced its supply cut. It was widely expected that the cartel would cut itsproduction by nearly 10 million B/D, and they have delivered.

OPEC+ is done with its job–for now. We need twoimportant factors to play their role, and they are as follows:

Non-OPEC+members need to show a similar enthusiasm to address the oil supply.

The globallockdown triggered by Coronavirus needs to end.

For buyers, the opportunity to get involved in thistrade was yesterday when the price dropped below $24 as it waspretty much given that the price would spike. Now, the questions for traders areis the increase enough, and what’s next for oil?

Demand is Still in Intensive Care Unit

The reason we are not going to see the oil price roarback to the pre-coronavirus level yet is that the demand shock is mammoth, andI have talked about this before. The current measure, supply cut, is enoughto drain some of the supply, but it is the demand equation that is entirely outof whack. If you are wondering how much, let’s take a look at the US’s totaloil consumption. The chart below shows that it is sitting at a thirty-year low.With the demand at such a low level, it is evident that we are not out of thewoods yet.

The Silver Line

Interestingly, the massive plunge, as demonstrated inthe above chart, occurred mainly due to the lockdown in the US, once thelockdown ends, a large portion of this demand is likely to recover. Therefore,the demand equation which right now looks battered may start to look better soon,and this means better oil price.  

What Else?

OPEC+ won’t be happy if the US doesn’t join with theoil production, which could result in the OPEC members failing to comply withthe agreement, or the deal could fall apart completely.   

Oil traders need to keep in mind that the US has been ramping up its production since the 2016 production cut by OPEC. The below chart shows the net change for OPEC, US, and OPEC+US oil production.

Clearly, the US has been the beneficiary of the recent(2016) supply glut. The oil production surged over 4.4 million B/D in the USwhile the OPEC cut its production by 5.7 million B/D. Overall, the oilproduction dropped by 1.5 million B/D since November 2016.

Next Stop

All eyes will be on the G-20 energy meeting now.Investors would like other oil-producing nations to pledge more oil cuts, andthey need to be above the level that OPEC+ has committed. OPEC+ doesn’t welcomethe natural oil production cut through CAPEX, and they have made this veryclear. Nations such as the US need to step up their game, only that willaddress the issues caused by supply. Otherwise, one can say that the patient isout of the intensive care unit (ICU) but still in the hospital, which leavesthe door open for the patient to end up in the ICU again.