Apr 13, 2020 - Energy & Environment

Markets cautious after new global oil pact

A Kuwaiti trader checks stock prices at Boursa Kuwait

A Kuwaiti trader checks stock prices at Boursa Kuwait. Photo: Yasser Al-Zayyat/AFP via Getty Images

Oil prices haven’t changed all that much in response to the announcement Sunday of an international agreement on historically steep oil production cuts.

Where it stands: The global benchmark Brent crude is trading in the $31-per-barrel range, not far from where it ended last week, and the U.S. benchmark WTI at around $23.

Why it matters: The market's reaction to the OPEC+ agreement suggests a couple of things...

  • One is that while the deal will help prevent the bottom from completely dropping out, it's nonetheless not enough to compensate for the near-term collapse in demand. Various analysts see a near-term hit in the 25 million-35 million barrel-per-day range.
  • Another is that much of the effects have already been priced into the market. Oil surged early this month when President Trump said Russia and Saudi Arabia were in talks about a big cut after their supply management pact collapsed in early March.
  • Also, the agreement is quite similar to the tentative plan that emerged Thursday.

Catch up fast: The OPEC+ group led by Saudi Arabia and Russia reached a final deal to jointly cut production by 9.7 million barrels per day in May and June, which would represent about 10% of global demand before COVID-19.

The size of the cuts then decline in stages through April of 2022 (though things will be reassessed along the way).

The big picture: It's part of wider — and looser — commitments that add several million more barrels per day to the total figure, perhaps bringing the theoretical total to the 15 million range or even higher, though there's no precise tally.

  • Producers outside the group, notably the U.S., met virtually under the G20 umbrella Friday and are touting production cuts.
  • President Trump was personally involved in the negotiations, but U.S. officials have not offered firm commitments. Instead, the Energy Department emphasized in recent days that low prices and collapsing demand are forecast to reduce U.S. production by roughly 2 million-3 million barrels per day by year's end due to market forces.
  • Saudi Arabia, the UAE and Kuwait may voluntarily cut more deeply than their formal quotas, adding another roughly 2 million barrels per day combined, per reports in S&P Global Platts, International Oil Daily and elsewhere.

Threat level: The oil sector still remains in deep distress. Bloomberg notes that the deal "won't save the weakest" among shale producers, and Axios' Dion Rabouin points out that more bankruptcies and defaults await, something we also looked at here.

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