Oil accord inadequate to avert glut
dubai — Oil prices turned negative on Monday before recovering despite a historic Opec+ accord on record output cuts amid market concerns that the move, seen by some pundits as “a temporary truce rather than a permanent deal”, will not be sufficient to head off oversupply.
Goldman Sachs said the landmark deal to reduce output by 9.7 million bpd — representing around 10 per cent of global supply — for May and June to stem a relentless price plunge would not be effective in the coming weeks, reasoning that a “historic yet insufficient” deal by major oil producers is unlikely to offset a coronavirus-led demand rout.
Brent futures were up 63¢, or 2 per cent, to $32.11 a barrel 1636GMT on Monday, while US West Texas Intermediate (WTI) crude rose 42¢, or 1.9%, to $23.18.
“What this deal does is enable the global oil industry and national economies and other industries that depend upon it to avoid a very deep crisis,” said IHS Markit vice-chairman Daniel Yergin.
The Saudi energy minister said that effective oil supply cuts would amount to 19.5 million barrels per day, because of higher output in April from Saudi Arabia, the UAE and Kuwait as King Salman bin Abdulaziz, Russia’s President Vladimir Putin and his US President Donald Trump stressed the need to continue to fulfill their responsibilities to stabilise oil markets and support the global economy.
US President Donald Trump said on Monday the Opec+ group of oil producers is looking to cut output by 20 million barrels per day, double the 10 million barrels agreed to a day earlier.
“Having been involved in the negotiations, to put it mildly, the number that OPEC+ is looking to cut is 20 Million Barrels a day, not the 10 Million that is generally being reported,” Trump said on Twitter.
Minister Prince Abdulaziz bin Salman said effective global cuts including countries from outside the alliance could amount to as much as 20 per cent since Saudi Arabia, Kuwait and the UAE volunteered to make cuts even deeper than those agreed, which would effectively bring Opec+ supply down by 12.5 million bpd from current levels.
The kingdom pumped 12.3 million bpd in April, which is higher than its agreed reference level of 11 million bpd under the new pact, meaning the effective cut by Saudi Arabia is about 3.8 million bpd. Actual oil production reductions from both Kuwait and the UAE will be also more than what was agreed under the agreement.
Iraq’s oil minister Thamer AlGhadhban said the “massive oil cut deal will help lower oil inventories and boost prices.”
Goldman Sachs saw downside risks to its short-term oil price forecast of around $20 per barrel for Brent, but projected the global crude benchmark would outperform U.S. oil because Opec+ producers’ exports would likely fall, freeing up floating storage space.
Even with core-Opec members fully complying with the cuts, and 50 per cent compliance by all other countries that have agreed to curb production in May, the voluntary cuts would translate into a reduction of only 4.3 million bpd from first-quarter levels, the bank said. A bigger output cut by G20 nations would also not help much, it said.
“Ultimately, this simply reflects that no voluntary cuts could be large enough to offset the 19 million bpd average April-May demand loss due to the coronavirus,” said Goldman Sachs.
Morgan Stanley raised its thirdquarter Brent and WTI price forecasts to $30 per barrel from $25, and to $27.50 per barrel from $22.50, respectively. It likewise raised its fourth-quarter outlook by $5 per barrel for both crude benchmarks, to $35 for Brent and $32.50 for WTI.
Morgan Stanley projected demand to fall about 14 million bpd year-on-year in the second quarter. Analysts said even at full compliance, demand weakness concerns capped oil price gains. Worldwide fuel consumption is down roughly 30 per cent because of the pandemic.
“We expect the Opec+ decision at best to establish a floor under the market. We do not expect a sustained recovery in the oil price until pent-up demand is released in Q3,” said Harry Tchilinguirian, analyst at BNP Paribas.
Ehsan Khoman, head of MUFG Bank’s Mena Research and Strategy, said the prospects of a sustained rally are vanishingly slim.
“We maintain our view that the unprecedented oil price collapse is not yet over and believe that the next leg lower in prices will be a function of the scale of production that will inevitably have to be shut-in.”
The leading Japanese bank did not rule out Brent sporadically testing cash-costs levels below $20 per barrel this month, but bouncing back and ending second quarter of 2020 at $32 per barrel, as Covid-19 slowly ebbs out of the market and the ballooning oversupply begins to ease.
“As Covid-19 slowly ebbs away and with it oil demand begins to recover -– likely from July onwards -– this points to a potential sharp oil price rally from second half of 2020 onwards, as producers are simply unable to respond and inventories draw quickly. In our view, this development could derail the very existence of such coordinated cuts, with Opec+ unlikely to be willing to support prices for ‘free riders’ in the oil industry any longer. Thus, this agreement could inevitably signal a temporary truce rather than a permanent deal.”