The rebound in oil prices quickly faded less than a day after the final shape of the OPEC/Russia led agreement for cuts to global production was released on Sunday.
Prices eased at the start of Monday’s session, then kicked up more than 4% and then faded into US trading.
May West Texas Intermediate oil fell 35 cents, or 1.5%, to settle at $US22.41 a barrel in New York. June Brent crude futures rose 26 cents, or 0.8%, at $US31.74 a barrel in Europe.
The biggest cuts in the agreement – 9.7 million barrels a day, only last until the end of June when they fall to 8 million barrels a day until December this year and then down to 6 million barrels a day until early 2022.
With global demand down more than 15 million barrels a day, on top of high levels of surplus oil from previous months, analysts say the OPEC/Russia cuts do not add up to a cut big enough to make a difference to the surplus and to put a floor under world prices.
At the moment consumption of key oil products such as petrol and jet fuel (and petrochemicals) and now, diesel, is falling faster than the cuts to oil production can be made.
That imbalance is sending oil stocks soaring and causing growing fears about the worlds running out of storage.
Before Easter prices took a hammering. West Texas Intermediate May crude futures lost $US2.33 on Thursday, or 9.3%, to settle at $US22.76 a barrel after trading as high as $US28.36. It fell 19.7% for the four day week.
June Brent crude lost $US1.36, or 4.1% on Thursday, to settle at $US31.48 a barrel after hitting an intraday peak of $US36.40. The front-month international contract was 7.7% fell last week.
The reason for the weakness after the long-delayed (by four days) announcement of the production cut was best summed up by Goldman Sachs which said on Sunday that the deal between major oil producers to cut output by nearly 10 million barrels per day was ‘historic yet insufficient.’
It added that no deal would be enough to offset the sharp drop in demand already occurring.
In other words, the cuts are not enough to offset the surge in surplus oil around the world caused by the economic slump generated by the COVID-19 pandemic.
Goldman Sachs said it still expects oil prices to fall in the coming weeks as storage fills rapidly even as the OPEC and its allies (Russia) agreed to chop world supply.
Last week as the market awaited difficult talks to conclude a deal both Goldman Sachs and said a 10-15% cut in supply might not be enough to arrest the price decline.
Both forecast Brent prices would fall back to $US20 per barrel from $US32 at the moment and $US70 at the start of the year.
The final agreement by the OPEC+ group came after four days of drawn-out talks, which at one stage had threatened to unravel despite the backing of the US and G20 energy ministers after Mexico — a relatively small oil producer — angered Saudi Arabia by seeking an exemption from the deal.
Mexico didn’t want to cut its output by 400,000 barrels a day as suggested by OPEC and Russia and instead offered 100,000. The US offered to ‘lend’ Mexico 200,000 or so barrels a day and then recover it later, but that didn’t go down well. But eventually, a deal was reached on Sunday, four days after it was supposed to be signed off.
OPEC+(mostly the Saudis and Russia) agreed to cut output by 9.7 million barrels per day (BPD) for May-June. The group reckons there will be another 5 million barrels a day of cuts coming from the likes of Norway and Canada with the US offering its ‘cuts’ which in reality are the plunging levels of output from the country’s weakening fracking sector. Already 600,000 barrels a day of production has been lost by companies responding to weaker prices by stopping drilling or capping holes.
America’s Energy Information Administration (EIA) forecasts that US “crude oil production will average 11.8 million b/d in 2020, down 0.5 million b/d from 2019. In 2021, EIA expects U.S. crude production to decline further by 0.7 million b/d.” That would see output down to just over 11 million barrels a day, from the 13 million barrels a day the sector produced for two months this year till mid-March.
The EIA estimated in its short term energy outlook for March that That global petroleum and liquid fuels consumption averaged 94.4 million barrels per day (b/d) in the first quarter of 2020, a decline of 5.6 million b/d from the same period in 2019. EIA expects global petroleum and liquid fuels demand will decrease by 5.2 million b/d in 2020 from an average of 100.7 million b/d last year.”
Reuters reported that OPEC is looking for some members to make bigger, voluntary cuts in output and purchases by companies with strategic oil reserves, such as the US (America has promised to make purchases, but hasn’t as yet) and China.
To that end, all sorts of spin are now coming from OPEC members, led by the Saudis.
Reuters reported that the Saudi energy minister said on Sunday that effective oil supply cuts by OPEC and its allies, a group known as OPEC+, will amount to 12.5 million barrels per day, because of higher output in April from Saudi Arabia, the United Arab Emirates and Kuwait.
“Prince Abdulaziz bin Salman was speaking to Reuters by telephone on Sunday after OPEC and allies led by Russia agreed to cut oil output by a record amount – representing around 10% of global supply – to support oil prices amid the coronavirus pandemic, and sources said effective global cuts including countries from outside the alliance could amount to as much as 20%.
He said 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, Reuters reported.
On Monday he and Donald Trump tried a new fudge, claiming the cuts were closer to 20 million barrels a day.
Reuters quoted Prince Salman as saying that the global oil supply cuts would amount to roughly 19.5 million barrels per day, considering the OPEC+ output-cut deal, pledges by other Group of 20 nations and oil purchases into petroleum reserves (200 million barrels).
Much of the 3.7 million cuts by non-OPEC+ countries (Norway, Canada, and the US) relies on oil field depletion and not actual well shut ins or turning valves or producing wells off. They are hoped for cuts, not actual reductions.
The simple matter is that the world is floating on a rapidly growing oil pool. The International Energy Agency reckons the surplus is 15 million barrels a day on top of the posted cuts by OPEC and its allies.
US energy analysts point to figures from the EIA last week on oil consumption in the US refining sector where the amount of crude being consumed has fallen by 7 million barrels a day or a third.
That has seen a record rise in US oil stocks to 484.4 million barrels with stocks of petrol and jet fuel soaring because of the sharp falls in car driving and airliners.
Petrol consumption fell 48% in the three weeks and jet fuel dropped 56%. As a result of falling consumption American oil refineries cut crude processing by almost 2.2 million BPD in that three week period.
