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Oil prices will shoot up if Saudi, Russia agree on supply cut: Jonathan Barratt

Oil demand should pick up once we get over the Covid crisis, said CIO, Probis Securities.

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Last Updated: Apr 03, 2020, 11.23 AM IST
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Jonathan-Barratt-1200
Any dip will be well supported given that we have two of the largest producers willing to cut supply.
We saw a massive rally in oil overnight and we have not really had any concrete information from the Saudi or Russia that they will be coming up with the production cut. We just have some information coming from Donald Trump that he anticipates some kind of an arrangement to be met. What is your take on this?
Yes, it has been quite interesting to see the market move so high on the basis of the tweets that came from the President. There is quite a lot of scepticism over what are the next steps or whether or not Trump is just trying to get the two parties together. Remember, no one is making money in this particular scenario when you look at Saudi, Russia and particularly when you look at the oil share market in the US that is loose all around. So I would not be surprised if Donald Trump mentions the fact that the supply cuts will help the industry as a whole if in fact they can pull it off.

If you look at the overall oil supply versus oil demand, demand has really contracted over the last year and supply has considerably shot up. So let us say, even if the Saudi and Russia both have a production cut in effect, I doubt they are going to reduce it lower than their historic level. So do you think even if there is some kind of minor production cut right now, it is really going to have a bearing on the supply that much and possibly drive the price higher?
Yes, we will certainly shore up at the time when demand comes back on. What a lot of people are viewing overall is the fact that the demand shocks that we have seen over the last couple of months will pass some stage. The recent manufacturing data out of China suggests they perhaps have been a little bit better. So if we take the goodwill scenario over there, we should get back to a relatively reasonable demand forecast once we get through the concerns that we have over the Covid issues. So in my mind, I am quite optimistic from here that what Donald Trump has said, what Saudi Arabia and Russia should do should create a market where the price of oil would go up from these levels. So in my mind, if I were a consumer, I would probably look to do some hedging.

You do not think this is a dead cat bounce? Is it more of a structural move leading to a higher oil price? Let us say, today or in the coming days we do hear some positive news coming in from both these very large producers of oil, do you see further improvement in the price in terms of a near-term spike or do you believe for the near term, it has been absorbed and we will really have to wait to see how long term demand picks up to propel it above $30?
If we get concrete discussions in the emergency meeting of OPEC plus and come together to discuss what the demand picture should look like and discuss cut in supply, then that will undermine any price movements to the downside. So any dip will be well supported given that we have two of the largest producers willing to cut supply. So moving forward, let us see what comes out of the meeting and what is resolved. If there are cuts, which will be widely expected as they were before, then that would shoot up the price for the commodity.

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