Apr 13, 2020 - Economy & Business

OPEC's production cut agreement won't stop the oil industry's free fall

Dion Rabouin, author of Markets
Data: Investing.com; Chart: Axios Visuals

Oil prices rose after news of a production cut agreement between the world's largest producers, but experts warn the move will not be enough to sustainably hold up prices or change the industry's bleak trajectory.

Driving the news: Crude futures jumped about 5% to near $25 a barrel for WTI crude after the OPEC+ alliance agreed to a 10 million barrels-per-day production cut beginning in May that ended a price war between Saudi Arabia and Russia.

  • However, the COVID-19 outbreak has slammed demand to that point that experts believe a cut of 20 million to 30 million barrels per day will be needed to offset the loss in the roughly 100 million barrel-per-day market.

Why it matters: With oil prices expected to continue their fall, a tidal wave of bankruptcies, defaults and closures of U.S. oil-and-gas companies is likely in the coming weeks and months that will weigh on bond and equity markets as well as the broader economy.

What's happening: Almost 40% of oil and natural gas producers face insolvency within the year if WTI crude prices remain near $30 a barrel, according to a new survey from the Kansas City Fed.

  • Even if oil prices rise to $40 a barrel — a nearly 40% jump from their current level — the percentage of firms expected to fall into insolvency only declines to 36%.
  • The Kansas City Fed's survey mirrored results from the Dallas Fed last month.

Word on the street: "I don't know of any companies that can operate profitably at [$40 per barrel]," said one respondent to the Kansas City Fed's survey.

Yes, but: "Oil majors proved resilient to extreme price volatility during the last oil price crash and they have already announced similar measures to protect their cash flows during the current crisis," Moody's Investors Service said in a recent note.

Be smart: Energy companies are the biggest issuers of junk bonds, accounting for more than 11% of the U.S. high yield market.

  • Even though the Fed has moved into purchases of some high yield bonds, much of the energy sector is highly levered and unlikely to meet standards for rescue from the central bank's ever-expanding world of asset purchases.

What to watch: Goldman Sachs analysts said they expect WTI crude prices will fall to $20 a barrel as downside risks overwhelm the near-term boost to sentiment.

  • “Ultimately, the size of the demand shock is simply too large for a coordinated supply cut, setting the stage for a severe rebalancing."

Go deeper: A world locked down and drowning in oil

Go deeper

OPEC+ eyes extension of oil production cuts

OPEC conference at Vienna in March 2020. Photo: Askin Kiyagan/Anadolu Agency via Getty Images

OPEC+ members are in talks to lengthen current crude oil output curbs instead of loosening the restrictions as envisioned in their April agreement, per reports in Bloomberg and Reuters.

Driving the news: The OPEC+ group — which includes OPEC, Russia and allied producers — are eyeing an extension of the 9.7 million barrels per day production cut for one or two months, Reuters reported. Bloomberg notes it could be three.

Updated 8 mins ago - Politics & Policy

Trump says RNC is looking outside of North Carolina for convention site

North Carolina Gov. Roy Cooper in 2018. Photo: Sara D. Davis/Getty Images

President Trump tweeted on Tuesday night that because of ongoing coronavirus restrictions in North Carolina, the Republican Party will be "forced to seek another state" to host its convention in August.

The big picture: The late-night tweet came after North Carolina Gov. Roy Cooper (D) told convention organizers earlier Tuesday that Republicans should plan for a "scaled-down convention with fewer people, social distancing and face coverings" given the impact of the pandemic.

Updates: George Floyd protests continue past curfews

Police officers wearing riot gear push back demonstrators outside of the White House on Monday. Photo: Jose Luis Magana/AFP via Getty Images

Protests over the death of George Floyd and other police-related killings of black people continued Tuesday across the U.S. for the eighth consecutive day, prompting a federal response from the National Guard, Immigration and Customs Enforcement and Customs and Border Protection.

The latest: Even with early curfews in New York City and Washington, D.C., protesters are still out en masse. Some protesters in D.C. said they were galvanized by President Trump's photo op in front of St. John's Church on Monday and threat to deploy U.S. troops in the rest of country if violence isn't quelled, NBC News reports.