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Oil Continues To Rally As Norway Decides To Cut Production

Vladimir Zernov

Oil Video 30.04.20.

Norway Announces Oil Production Cuts

Norway has officially announced that it will be cutting its oil production from June 2020 to December 2020. Norway will start with a production cut of 250,000 barrels per day (bpd) in June. After this, the country’s oil production will decline by 134,000 bpd.

In addition, Norway will delay the start-up of several oil fields until 2021. As a result, the country’s oil production in December 2020 should be 300,000 bpd less than initially expected.

As a reference point, Norway used production levels of 1.859 million bpd. This means that the country will cut its oil production by 13.5% in June. In comparison, Russia has recently ordered its domestic oil producers to cut production by 20% from February levels.

While Norway’s production cut is not as big as Saudi Arabia’s or Russia’s, it is a very important signal that countries outside OPEC+ are ready to cooperate in order to stabilize the market.

Such production cuts are especially welcome at a time when estimates of actual hit to oil demand vary widely and there’s great uncertainty regarding the pace of the economic recovery after lifting of coronavirus containment measures.

At this point, it looks like the market will need continued deep production cuts to stabilize the supply/demand balance and reach more reasonable price levels by the end of the year.

American And European Majors Follow Different Capital Allocation Paths

The dividend has always been a sacred cow for any oil major. However, the current crisis is unprecedented, and oil majors face a challenging choice. Maintaining the dividend will impair the ability to invest in new projects and damage financial stability, while cutting the dividend will damage the share price.

Dividend decisions are important not only for the companies’ shareholders but also to the oil market since they impact the amount of new investments in the next few years.

Currently, American companies are choosing to maintain the dividend – Chevron and Exxon Mobil decided to leave their dividends intact. In Europe, the trend is to cut the dividend – Equinor and Shell announced massive dividend cuts.

In case the crisis is prolonged, European companies will likely outperform their American counterparts who will be forced to cut dividends anyway in such scenario. However, the choice of American majors to maintain the dividend is good for the industry since it limits their short-term ability to invest, which is especially important on the shale oil front. Longer-term, such dividend decisions are bullish for oil prices.

 

This article was originally posted on FX Empire

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