Northwest Arkansas Democrat-Gazette
Investors: OPEC-Russia cut lacking
Oil prices slumped Thursday as investors saw an OPEC-Russia supply-cut proposal as insufficient to offset estimates for decline in demand caused by the covid-19 outbreak.
OPEC and its allies, meeting by video conference, agreed Thursday to cut production by about 10 million barrels a day in May and June, delegates said, asking not to be identified ahead of an official statement. That compares with estimates for demand loss of as much as 35 million barrels a day. The oil allies also plan to seek an additional cut of 5 million barrels a day from Group of 20 countries, whose energy ministers will meet today.
A contribution from the G-20 could give extra potency to efforts to revive prices. Russia has insisted that the U.S. in particular do more than just let market forces reduce its record production.
President Donald Trump, meanwhile, has said America’s cut will happen “automatically” as low prices put shale in dire straits, a sentiment reiterated by his energy secretary on Thursday.
The U.S. is the world’s top producer now, and the slide in crude prices is causing huge financial damage to companies in the oil patch.
Benchmark U.S. crude oil fell $2.33, or 9.3%, to settle at $22.76 per barrel after being above $28 earlier. Brent crude fell $1.36, or 4.1%, to $31.48 per barrel.
“Both Saudi and Russia were going to have to cut anyway, and these cuts allow
them to win political points too,” said Amrita Sen, chief oil analyst at consultant Energy Aspects Ltd.
The plan would see the output curbs tapering off after two months, depending on the evolution of the coronavirus. The 10 millionbarrel-a-day cut may shrink to 8 million a day from July and then 6 million a day from January 2021, according to one delegate.
Major producers are scrambling for a deal as energy consumption has plummeted and hammered prices. Oil demand in India has collapsed by as much as 70%, and some American refineries face closure as consumption fell to the lowest in at least three decades. Producers will need to agree on a deep and prolonged supply cut, or risk crude falling back again.
While the anticipation of a production agreement has pushed prices slightly higher, West Texas Intermediate crude is still down more than 55% this year. That is giving India an opportunity to bolster its strategic reserves, while South Korea has said it will expand its storage this year.
Still, the demand drop in the U.S. is a significant concern for investors who are worried that the worst is yet to come. Local consumption of petroleum products fell last week to the lowest level in decades, according to weekly Energy Information Administration data.
“Covid-19 is an unseen beast that seems to be impacting everything in its path,” OPEC Secretary-General Mohammad Barkindo said in a speech at the online gathering. “The supply and demand fundamentals are horrifying” and the expected oversupply, particularly in the second quarter, is “beyond anything we have seen before.”
Barkindo urged action to tackle the growing surplus, which he estimated at 14.7 million barrels a day in the second quarter. And he wants action not only from OPEC and Russia but from nations beyond the alliance.
OPEC and its allies, and the G-20, face a huge task in trying to drain the large oversupply. But there are signs that the market is banking on improved balances down the line. Volatility for the second half of 2020 has fallen sharply in recent days, indicating that the market has faith in the big producers restoring price stability, brokerage Marex Spectron wrote in a report.
The oil market was already oversupplied when Russia and OPEC failed to agree on output cuts in early March. Analysts say Russia refused to back even a moderate cut because it would have only served to help U.S. energy companies, which were pumping at full capacity. Stalling served to hurt American shale-oil producers and protect market share.
Russia’s move appeared to enrage Saudi Arabia, which not only said it would not cut production on its own but said it would increase output instead and reduce its selling prices in what became effectively a global pricing war.
In the time since, prices have collapsed.
In Russia, which relies on oil as the main source of income, the price collapse caused the ruble to crash, which in turn boosted the cost of imports and sped up inflation.
In his opening remarks at the start of Thursday’s call, Russian Energy Minister Alexander Novak emphasized the need for “all oil-producing countries to pool efforts to change the situation of a significant global oversupply.”
“We believe it necessary to increase the number of countries that could join efforts to help stabilize the situation,” he said, welcoming Norway, Canada, Indonesia and a few other countries that previously hadn’t been part of the talks.