Oil prices fell on Tuesday as the market’s focus returned to weak demand as traders lost what little enthusiasm they had for the production cut deal from OPEC and Russia and endorsed by President Donald Trump.
In Texas, oil companies were debating on Tuesday whether state regulators should force producers to make across-the-board 20% output cut that could further prop up prices.
The Texas Railroad Commission has the power to regulate oil output in the state and was meeting to discuss a cut deal of its own. Texas is the largest producing state in the US and accounts for around 40% of national output.
West Texas Intermediate crude for May delivery fell $US2.30, or 10.3%, to settle at $US20.11 a barrel in New York after a brief dip to $US19.95. Prices for the front-month contract hit the lowest finish since March 30.
In Europe, June Brent crude lost $US2.14, or 6.7%, at $US29.60 a barrel, the lowest since April 1.
While the output cuts agreed to by major producers on Sunday are “substantial, they still fall short of bringing the market to balance over 2Q20,” said Warren Patterson, head of commodities strategy at ING, in a note.
“With demand destruction forecasts ranging from 15 million to 22 million BPD in April 2020 and these measures not even coming into place until May, we are likely to see a substantial overhang in the short-term,” said Nitesh Shah, director of research at New York-based WisdomTree Investments.
OPEC and its allies (mainly Russia), collectively known as OPEC+, agreed finally on Sunday to cut output by 9.7 million barrels a day until the end of June.
The total cuts would decline to around 8 million barrels a day from July 1 through Dec. 31, followed by a smaller 6 million barrels in cuts from January. 1, 2021 to April 30, 2022.
The group claimed cuts of 5 million barrels a day would be made by other producers outside OPEC such as Norway and Canada, while the US pointed to the emerging slide in fracking production in the US because of low prices, as a contribution to the deal.
US production is starting to drop, the Energy Department said on Monday, with estimated shale output expected to fall by 200,000 BPD in April, a record. The US Energy Information Administration says oil production in the country is 600,000 barrels a day lower at 12.4 million barrels than it was a month ago.
Trump and the Saudis claim the deal will see a total cut of close to 20 million barrels a day, but no one believes that assertion.
But analysts say these are not real cuts and any reduction by these groups could easily be reversed if prices start rising.
The global economic outlook is bad for oil also, with the International Monetary Fund on Tuesday forecasting a 3% contraction in the global economy this year, followed by a 5.8% rebound in 2021.
That’s a deeper recession than during the GFC in 2008-09. The IMF said the US economy would shrink 5.9% this year.
Analysts say that this points to continued weak demand for oil and more downward pressure on prices.
