LONDON: Global oil traders have shrugged off Sunday’s historic output-cutting deal by OPEC and its allies, with prices languishing not far from recent two-decade lows. The market failed to win traction from the deal, which fell short of expectations and resulted from Easter weekend video-conference talks led by the Organisation of the Petroleum Exporting Countries.
Where are oil prices now?
In late afternoon European deals, international benchmark London Brent North Sea oil stood at $31.04 per barrel, compared with $34.36 last Thursday before talks began. US benchmark West Texas Intermediate crude meanwhile traded at $21.81 a barrel on Tuesday, down from $26.80. Both contracts had crashed late last month on virus-linked demand fears and a Saudi-Russia crude price war. WTI had slumped as low as just $19.27 per barrel on March 30, when Brent had also nosedived to $21.65 per barrel. Those levels were last witnessed in 2002. The collapse prompted top producers to tighten the taps to stop hemorrhaging precious oil revenues.
Are the cuts enough?
OPEC producers dominated by Riyadh, and their allies led by Moscow, thrashed out a compromise deal on Sunday to cut production by 9.7 million barrels per day from May. Yet traders remain doubtful over the impact because the cuts nevertheless fell short of expectations, amid fears over plunging demand on COVID-19 fallout. “The OPEC+ deal has received the underwhelming reception it deserves, frankly, with producers delivering right at the bottom end of expectations after days of talks,” said OANDA analyst Craig Erlam. “This may be the largest ever cut but we are living through an unprecedented event and demand has fallen off a cliff.”
Futures briefly bounced Tuesday after US President Donald Trump tweeted producers were considering cutting 20 million barrels per day. Influential Saudi energy minister Prince Abdulaziz bin Salman also indicated cutbacks by OPEC and its allies, together with pledges from other G20 nations and purchases by strategic reserves, could remove 19.5 mbpd from the market. “There is still a lot uncertainty over whether the reduction in output will be enough,” said Markets.com analyst Neil Wilson. “Most think OPEC and allies have not done enough to prop up prices in the near term, albeit they do seem to have shown a willingness to prevent a complete collapse.”
What is market outlook ?
Global oil supplies are currently outstripping global demand by as much as 30 million barrels per day, according to Alfa Energy chairman John Hall. “What we have to remember is that the supply-demand imbalance could be as high as 30 mbpd,” Hall told AFP. “A recent figure from OPEC has warned of a figure of 14.7 mbpd, so this cut – although the largest ever – is probably not even half way to what is actually needed to supposedly re-balance the market.”
Rystad Energy predicts oil demand will hit 28 million barrels per day (mbpd) in April and 21 mbpd in May. That is far below “normal” demand of 100 mbpd, according to Rystad. The IMF meanwhile forecast Tuesday that oil prices will likely remain below $43 throughout 2023 due to “persistently weak demand” in a deep global recession sparked by coronavirus. However, the IMF did also admit that the rapidly falling cost of oil – which greases the wheels of the global economy – should nevertheless give a big boost to consumer nations.
Will OPEC deal be respected?
Compliance among OPEC member nations over the cartel’s production quotas has long been a controversial topic, analysts agree. “We should not forget how difficult OPEC found it to comply with the production quotas in the past three years,” said Commerzbank analyst Eugen Weinberg. “In fact, compliance was achieved mainly thanks to involuntary production outages and over-compliance on the part of Saudi Arabia.”
ING analyst Warren Patterson added: “The group has agreed on historic cuts, and now we have to see whether they will stick to them. “Unlike previous deals, it is hard to see the likes of Saudi Arabia cutting output by more than their quota, in order to make up for shortfalls from others, given the scale that they have already agreed to cut.”
Many industry experts expect the global oil market will remain caught between plentiful crude and virus-ravaged demand for the foreseeable future. “With the coronavirus-led slowdown taking a toll on the global oil demand, the supply side news could be rapidly forgotten,” said Swissquote Bank analyst Ipek Ozkardeskaya. “The historic cut did not spark the market reaction that oil producers were hoping for. “Wide controversies among oil producer nations hinted that a further action is probably unlikely.” – AFP