MUSCAT: Crude futures fell Thursday as an emergency OPEC+ group meeting resulted in a production cut agreement that was likely too limited in scope to compensate for the drop in global oil demand caused by the coronavirus pandemic.
OPEC and its allies on Thursday forged a historic agreement to claw back 10 million b/d of crude production, according to sources involved in the negotiations, under political and financial pressure to try and stem a bruising rout in oil prices caused by the coronavirus pandemic.
The deal would see the 23 members of the OPEC+ alliance, led by Saudi Arabia and Russia, coordinate the world’s largest production cut ever, just a month after the two countries launched a vicious price war that upended the oil industry and exacerbated fears of a global recession.
The cuts will cover the months of May and June, before being rolled back to 8 million b/d for the rest of 2020 and then down to 6 million b/d for 2021, sources said.
OPEC has not released a full breakdown of how the cuts will be divvied up, nor the baseline production levels from which the new quotas will be determined. But sources said every member would cut 22% of their output, with Saudi Arabia and Russia both committing to holding their production to 8.5 million b/d for the two months of the deal.
The cuts were much more limited in scope than markets had anticipated even earlier in the day. Oil prices spiked as much as 13 per cent in the first minutes of the OPEC+ meeting on speculation that a broader deal might be at hand to take closer to 20 million b/d off the market. Front-month WTI settled down 9% in Thursday’s session to the lowest since April 1, the day before the OPEC+ meeting was announced.
OPEC+ ministers will meet again on June 10 via videoconference to review market conditions and decide whether any changes are needed, sources said.
The OPEC secretariat’s analysis of the market now sees a 6.8 million b/d contraction in global oil demand for the whole of 2020, including close to 12 million b/d “and expanding” for the second quarter.
S&P Global Platts Analytics expects global oil demand to contract by 4.5 million b/d in 2020, down from a projected growth of 1.3 million b/d at the start of the year. But demand destruction is expected to peak in the near-term at around 20 million b/d.
“At the current rate of stock build, storage will be full at some point in May and crude production will need to be curtailed by 15-20 million b/d,” S&P Global Platts Analytics Global Head of Analytics Chris Midgley said. “The current proposed 10 million b/d may be too little too late as it will have limited impact on April production and only if sustained from May for the balance of the year might we avoid hitting tank tops. “An emergency meeting of the G20 energy ministers is slated for Friday for other countries to discuss how much they might be willing to scale back crude production, potentially adding another 5 million b/d or so of cuts beyond OPEC+. But the US, the world’s largest producer, has continued to resist formally joining in on any deal, arguing that US cuts will come organically from the collapse in oil prices and global demand from the coronavirus pandemic.
US crude output fell 600,000 b/d to 12.4 million b/d during the week ended April 3, US Energy Information Administration data showed Wednesday. But US crude inventories still posted their largest-ever one week build that week, climbing 15.18 million barrels to 484.37 million barrels. (S&P Global Platts)