Some of the world’s largest oil producers are finalizing a deal that would take an unprecedented 10 million barrels a day of global crude supplies off the market in an effort to fight the devastating effects of the coronavirus pandemic.
Crude prices are crashing anyway.
Futures in New York plunged 9% even as Saudi Arabia ended its price war with Russia and orchestrated an unprecedented 10 million barrel-a-day production cut among OPEC and its allies. Oil in London closed 4% lower.
The seemingly unstoppable collapse in oil markets underscores how dramatic the plunge in oil demand has become as the virus ravages world economies, prolongs lockdowns, grounds planes and keeps cars off the road. Even an agreement to eliminate 10% of global crude supply, while extraordinary, isn’t enough to offset demand losses of as much as 35 million barrels a day.
At stake in the worst market rout in nearly two decades are entire oil-independent economies -- including Saudi Arabia’s -- as well as thousands of companies, countless oil industry jobs and tens of billions of dollars in spending. Prices have already plunged to the lowest levels in two decades, triggering shale bankruptcies and shutting oil fields all over the world.
“A 10 million-barrel-a-day deal is far lower than what the market needs at the moment,” Rystad Energy’s Head of Oil Markets Bjornar Tonhaugen said in a note Thursday. “Now hopes can only rely on what other countries outside the alliance will do.”
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The decision at the OPEC+ virtual gathering 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 reiterated by his energy secretary on Thursday.
The alliance is seeking reductions of as much as 5 million 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 fell to the lowest in at least three decades. U.S. petroleum consumption fell to the lowest level in decades last week, according to the EIA.
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.
©2020 Bloomberg L.P.
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