Record Oil Output Cuts Fail to Make Waves in Coronavirus-Hit Market
After several days of deliberation, the Organization of the Petroleum Exporting Countries (OPEC) and allies led by Russia hammered out an agreement to cut output by 9.7 million barrels per day in May and June, equal to nearly 10% of global supply.
Other major producers like the United States and Canada gave indirect commitments to cuts as well, playing up forecasts for drastic production declines in coming months due to the free-fall in prices.
The oil market has barely shrugged, however: Brent crude gained 1.5% on Monday, while U.S. crude ended the day lower. The move underscores what both investors and producers already understand – that the monumental deal to cut supply in face of a 30% drop in demand could only accomplish so much initially.
Saudi Arabia’s energy minister downplayed the move in oil prices on Monday, saying anticipation of the cuts was the reason for a rally in oil prices before the meeting. Since dipping below $22 a barrel two weeks ago, Brent has rebounded by roughly 48%.
“It’s the typical deal, you know: buy the rumour, and sell the news,” Prince Abdulaziz bin Salman said.
The minister added on Monday that effective global oil supply cuts would amount to around 19.5 million barrels per day, taking into account the reduction pact agreed by OPEC+, pledges by other G20 nations and oil purchases into reserves. He said that G20 nations had pledged to cut about 3.7 million bpd and that strategic reserves purchases would reach roughly 200 million barrels over the next couple of months,
Both Brent and WTI have lost more than half of their value this year.
The cut by OPEC+ may be more than four times deeper than the previous record set in 2008 and overall oil supply may shrink by twice that with other measures. Yet the reduction remains dwarfed by a demand drop predicted by some forecasters to be as much as 30 million bpd in April.
“Even if these cuts provide a floor to prices they will not be able to boost prices given the scale of inventory builds we are still staring at,” Energy Aspects analyst Virendra Chauhan said.
“The absence of hard commitments from the United States or other G20 members is (a) shortcoming of the deal.”
Big producers such as Canada, Norway and the United States have yet to commit publicly to fixed quotas. However, U.S. shale output, which accounts for about 75% of overall U.S. crude production, is expected to drop by nearly 400,000 bpd by May, the U.S. Energy Department said on Monday.
Because of the deep OPEC+ cuts, the U.S. shale industry may avoid the worst-case scenario of a 3.5 million bpd production drop, instead falling just 1.8 million bpd, analysts at Bank of America said on Monday.
“The deal failed to reach the reduction levels anticipated by the market,” Takashi Tsukioka, president of the Petroleum Association of Japan (PAJ), said in a statement.
“We hope OPEC+ will continue their talks to stabilise oil markets,” he said.
While the core number in the deal suggests a near 10 million bpd cut, Middle East producers such as Saudi Arabia, the United Arab Emirates and Kuwait may have to reduce by more than the 23% cut to which they signed up.
FOCUS ON RESERVES
Energy analysts at FGE expect oil stockpiles in developed nations to grow in the second quarter to levels last seen in 1982.
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