(Bloomberg) -- Oil retreated from earlier highs as Saudi Arabia and Russia reached an outline of a new output cut deal at the virtual OPEC+ meeting.
Brent futures were up 2.1% after earlier jumping more than 10%. That reflects concern that the volume of cuts being discussed equates to just a fraction of the demand loss, which some traders estimate at as much as 35 million barrels a day. The Organization of Petroleum Exporting Countries and its allies, meeting by video conference on Thursday, now have the outline of a deal to cut production by 10 million barrels a day.
Decisions at the online gathering will form the basis of Friday’s discussions on further contributions from G-20 nations, with U.S. involvement seen as key.
Major producers are scrambling for a deal as energy consumption has plummeted and hammered prices. Oil demand in India has collapsed by as much as 70% and some American refineries face closure as consumption fell to the lowest in at least three decades. Producers will need to agree on a deep and prolonged supply cut, or risk crude falling back again.
See also: Global Oil Deal in Sight After Russia Signals Readiness to Cut
All but one of 26 analysts, traders and refiners surveyed by Bloomberg forecast that a production cut will be agreed this week, with the average of their estimates at 8.5 million barrels a day. While that’s a vast decrease, it would pale in comparison to the demand loss that some gauge is as much as 35 million barrels a day.
While the anticipation of a production agreement has pushed prices slightly higher, WTI crude is still down more than 55% this year. That is giving India an opportunity to bolster its strategic reserves, while South Korea has said it will expand its storage this year.
Still, the gains in the futures market aren’t influencing the physical oil prices. Key crudes in North America such as Western Canadian Select have been trading at single digit levels on an outright basis since late March. Grades such Bakken have also seen similar price trends. These grades are landlocked, and likely to be harder hit unlike those with more access to export markets. Global demand has also been stymied by processing cuts at refineries.
OPEC and its allies, and the G-20, face a huge task in trying to drain the large oversupply. But 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.
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