Possible OPEC Deal Fails to Buoy Oil Prices
April 09 2020 - 3:17PM
Dow Jones News
By Joe Wallace and David Hodari
Oil prices declined Thursday as traders weighed the impact of a
potential deal among major exporters to cut production amid the
coronavirus pandemic.
The initial verdict: The cuts could be too little too late to
match the sharp decline in fuel consumption around the world.
U.S. crude prices, as measured by West Texas Intermediate
futures, fell 9.3% to $22.76 a barrel, a roughly 20% swing from
intraday highs. Brent-crude futures, the global benchmark, lost
4.1% to close at $31.48, paring back earlier gains of more than
10%.
Prices shot up early as Saudi Arabia, Russia and other large
exporters met to discuss coordinated production cuts aimed at
buoying prices. Conflicting reports about the depth of proposed
cuts and the willingness of some nations to go along reversed the
morning rally and sent prices back down.
Saudi Arabia and Russia reached a preliminary agreement Thursday
to reduce production, people familiar with the matter told The Wall
Street Journal. The deal signals a possible end to weeks of feuding
and market flooding that has weighed on oil prices that have
already been rocked by the pandemic. Crude prices have fallen more
than half this year as millions around the world have stopped
driving and flying in efforts to slow the spread of the deadly
virus.
The tentative accord is being hammered out as Saudi Arabia and
other oil exporters work to broker a global consensus on
oil-production cuts with a view to removing 20 million barrels a
day from global supply, the people told the Journal. Investors
remain wary as a virtual meeting between the Organization of the
Petroleum Exporting Countries and its allies, led by Russia,
continues, with Iraq and other major oil exporting nations yet to
agree on cuts.
"A sizable cut would mitigate the issues we're seeing in terms
of hitting storage capacity globally," said Saad Rahim, chief
economist at commodities trader Trafigura. "But in a sense, it's
too little too late for this month given the collapse in demand.
The boats are loaded, the pipes are full, and the refineries are
cutting runs."
Saudi Arabia, OPEC's de facto leader, has agreed in principle to
lower production by four million barrels a day from output levels
in April, the Journal reported. Russia, which has led a group of
nations that had been coordinating with the cartel in recent years
to prop up oil prices, would cut output by half that amount.
U.S. Energy Secretary Dan Brouillette is due to take part in a
conference of oil ministers from the Group of 20 major economies
Friday, which may result in assurances of broader cuts. Though in
free-market economies, such as in the U.S. and Canada, there is
little that policy makers can do to quickly drive down
production.
Low prices are starting to do the job, however. U.S. oil
production during the week ended April 3 averaged 12.4 million
barrels a day, down from the 13 million that has been typical in
2020, according to U.S. Energy Information Administration data.
Meanwhile, the number of rigs drilling in the U.S. and Canada this
week dropped to 602 and 35, respectively, according to Baker Hughes
Co. That compares with 790 and 240 in late February.
Investors remain concerned that even the largest collective
production cuts in history may not be enough to support higher
prices in the coming weeks as world-wide lockdowns pummel demand
for gasoline, diesel and jet fuel. Global oil consumption is on
course to plunge by almost 35 million barrels a day in April,
according to Mr. Rahim.
Still, the reduction in output may help oil prices recover once
lockdowns are lifted.
"If you cut 10 million barrels, and China's recovering and
Europe then recovers and the U.S. starts to come out of [the
coronavirus lockdown], then oil demand gets really tight really
quickly," said Alan Gelder, vice president of refining and oil
markets at consulting firm Wood Mackenzie.
Production curbs could also ease logistical strains in the oil
market, stopping storage facilities from overflowing with a glut of
crude and lowering the cost of chartering oil tankers, which has
soared.
"It won't be enough to balance the market, but it will be enough
to handle the oversupply with the current available storage," said
Paola RodrÃguez-Masiu, senior oil analyst at Rystad Energy.
Traders will scour the fine print of any agreement. One key
detail is the baseline for the decline in output. Saudi Arabia,
Russia and others have started to pump more oil since earlier cuts
expired at the end of March, so there is a big difference between
reducing production from current levels and those that prevailed in
the first quarter.
Traders will also home in on the duration of any cuts, whether
there are mechanisms for enforcing compliance, and the degree of
involvement that OPEC and Russia require from the U.S.
Write to Joe Wallace at Joe.Wallace@wsj.com and David Hodari at
David.Hodari@dowjones.com
(END) Dow Jones Newswires
April 09, 2020 16:02 ET (20:02 GMT)
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