According to industry watchers, oil producers have a tough hurdle to overcome in order to restore market balance marred by plummeting demand and mounting stockpiles, as evidenced by the minimal impact on oil prices from the internationally-agreed record output cuts.
An agreement has been inked by the Organization of the Petroleum Exporting Countries (OPEC) and allies spearheaded by Russia after a few days of deliberation. The agreement entails that output will be slashed by 9.7 million barrels daily in May and June, an amount close to 10 per cent of global supply.
Indirect commitments to cuts have been shown by major producers like United States and Canada as they put emphasis on forecasts for sharp production declines in future months as a result of price collapsing.
On Monday (13 April), Brent crude increased 1.5 per cent whereas US crude closed lower. Even so, oil market has barely reacted. The move reflects what producers and investors are already aware of-initially, there is not much that can be done by the supply cut during a 30 per cent decline in demand.
The move in oil prices on Monday was not seen as something significant by Saudi Arabia’s energy minister, Prince Abdulaziz bin Salman, as he said that expectations about the cuts caused the oil prices to rally prior to the meeting. Two weeks ago, Brent price fell below USD$22 per barrel but now price has recovered by around 48 per cent.
He remarked: “It’s the typical deal, you know: buy the rumour, and sell the news.”
Factoring in the reduction pact agreed by OPEC+ and pledges by other G-20 countries and oil purchases into reserves, that effective global oil supply cuts would total to about 19.5 million barrels per day (bpd), as stated by Prince Salman on Monday.
G-20 countries had vowed to slash around 3.7 million bpd and strategic reserves purchases would amount to around 200 million barrels in the next few months, he added.
This year, Brent and WTI have both lost more than half of their value.
Compared to 2008, the cut by OPEC+ is more than four times and with other measures in place, overall oil supply might shrink by twice. Some forecasters believe that demand drop will still exceed the supply cut by as much as 30 million bpd in April.
According to Energy Aspects Analyst, Virendra Chauhan, “Even if these cuts provide a floor to prices they will not be able to boost prices given the scale of inventory builds we are still staring at. The absence of hard commitments from the United States or other G-20 members is (a) shortcoming of the deal.”
There has not yet been public commitment to fixed quotas by large producers such as the US, Norway and Canada. The US Energy Department stated on Monday that US shale output is expected to fall by almost 400,000 bpd by next month. US shale output makes up of around 75 per cent of overall US crude production.
Analysts at Bank of America also stated on Monday that the US shale industry may only drop just 1.8 million bpd, as opposed to the worst-case scenario of 3.5 million bpd drop in production. This is due to the deep supply cuts done by OPEC+.
The President of the Petroleum Association of Japan (PAJ) also stated that “The deal failed to reach the reduction levels anticipated by the market. We hope OPEC+ will continue their talks to stabilise oil markets.”
Middle East producers like United Arab Emirates, Saudi Arabia and Kuwait will need to cut by more than 23 per cent as they agreed upon, although the core number in the deal suggests around a 10 million bpd cut.
Priority on reserves
Oil stockpiles in developed countries are expected to grow in Q2 to the levels last observed in 1982, according to energy analysts at FGE.
On Monday, Brent futures contango deepened for both a six-month futures and for one year ahead. Brent futures contango is a market structure in which nearer term prices are lower than future prices.
Concerns over falling supply availability is reflected by the spread within the contango. Shipping tracker, Kpler noted that the global onshore crude storage was around 83 per cent full at the end of March.
Also, figures of strategic petroleum reserves (SPR) from the US Department of Energy are the market’s next major focus.
The inventory build would continue at a slower rate due to OPEC+ agreement, according to a veteran Singapore oil trader who wants to remain anonymous to observe company policy. Prices in the US increased whereas prices in Europe were unchanged even as crude selling prices were slashed by Saudi Arabia on Monday.
He said that “Most of the SPR (held by countries around the world) are pretty full already. Probably China still has some room, but the rest, I doubt there is anything significant.”
Contrary to other major countries whose oil demand is falling, China is an outlier as the world’s biggest oil importer whose oil demand is still increasing. In April, Chinese refiners will increase crude oil throughput by 10 per cent from last month amid the country’s earlier recovery from the pandemic.
An anonymous Beijing-based state oil company official pointed out that “China is unlikely to make any firm commitment, especially as Far East consumers are still paying a premium for Mideast supplies versus western consumers.”