Even OPEC+’s Deep Cuts Couldn’t Keep Oil Markets From Plunging

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Some of the world’s largest oil producers were finalizing a deal that would take an unprecedented 10 million barrels a day of crude off the market in an bid to resuscitate prices pummeled by the coronavirus pandemic.

The market’s crashing anyway.

A marathon OPEC+ video conference that went on for more than eight hours yielded an end to Saudi Arabia’s price war with Russia, established the contours of an historic supply-curb agreement, and laid the foundation for an even broader global accord to trim production. Yet futures in New York ended the day 9% lower while crude in London closed down 4%.

Oil’s seemingly unstoppable collapse underscores just how dramatically demand has deteriorated as the virus ravages world economies and brings modern life to a standstill. More than two-thirds of the world’s population is in lockdown — not driving, flying or otherwise burning fuel. Consumption is falling faster than anyone predicted, with demand losses seen reaching 35 million barrels a day by some estimates. Against that backdrop, an agreement to eliminate 10% of global crude supply — while extraordinary — isn’t a panacea.

The stakes could not be higher: OPEC+’s ability to correct the worst market rout in nearly two decades could bend the fortunes of energy players across the globe, from petro-states and Big Oil to traders and oilfield workers. Billions of dollars in spending and countless industry jobs are at risk as prices tumble, triggering shale bankruptcies and shutting oil fields all over the world.

The group’s success is far from certain. The last round of talks to balance the oil market ended with the collapse of the coalition in early March and kicked of a bitter war for market share. This time around, Saudi Arabia and Russia have both agreed to cut production substantially. Opposition now comes from Mexico, which has threatened to withdraw from OPEC+ over a disagreement with the supply-cut proposal, and is holding side talks with the U.S. and Canada. Eight hours into the meeting, U.S. President Donald Trump held a private call with Russian President Vladimir Putin and Saudi Arabia’s King Mohammed bin Salman.

If the OPEC+ virtual gathering does result in a deal, that will form the basis of Friday’s discussions on further supply cuts from G-20 nations, with U.S. involvement seen as key. The Kremlin has insisted that America must do more than just let market forces reduce its own record production. Trump, meanwhile, has said America’s cut will happen “automatically” as low prices put shale in dire straits, a sentiment }” target=”_blank”>reiterated by his energy secretary on Thursday.

The alliance is seeking reductions of as much as 5 million barrels a day from the G-20, but will reduce output even if the bigger group doesn’t join in, delegates said.

Meanwhile, oil demand in India has collapsed by as much as 70% and some American refineries face closure as consumption falls to the lowest in at least three decades.

Prices:
  • West Texas Intermediate settled down $2.33 to $22.76 a barrel in New York
  • Brent fell 4.14% to settle at $31.48 a barrel

The monthly rollover by the biggest oil ETF and index funds put additional pressure on the front of the WTI market, which has already been hit by concern that storage tanks in the U.S. will soon fill up. May’s discount to June traded at the widest level since 2009 during the session, and settled at $6.06 a barrel.

While OPEC and its allies, along with the G-20, face a huge task in trying to drain the large oversupply, 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 OPEC+ restoring price stability, brokerage Marex Spectron wrote in a report.

Other oil-market news
  • Saudi Arabia is again delaying the release of its key monthly oil pricing statement to wait for OPEC+ and the G-20 to meet and discuss production plans.
  • Global oil demand is being destroyed as the coronavirus forces people around the world to remain indoors and avoid all unnecessary travel.
  • The Atlantic Hurricane season’s risk may be growing. That’s because a key climate system known as El Nino, which affects weather p

— With assistance by Elizabeth Low, Alex Longley, and James Thornhill

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