Oil Leaps on Potential Global Output Cuts
Oil posted a record weekly jump on hopes that global producers will decide to make historic output cuts this week, though optimism was tempered by concern that the curbs won’t avert a glut.
The OPEC+ coalition including Saudi Arabia will hold a meeting of its members by video conference on the 6th April, with the gathering open to even producers outside the group.
While it’s unclear who will attend, market watchers are predicting that stockpiles are likely to swell even if global supplies are cut by ten million barrels a day.
Investors will be closing watching the guest list of the meeting — especially names outside the Organisation of Petroleum Exporting Countries and its allies — after Saudi Arabia made clear it will only cut production if others, including the US, shoulder some of the burden.
US West Texas Intermediate futures ended the week up 32%, while Brent crude jumped 37%. Still, prices are less than half the levels at the start of the year, with the coronavirus crisis crushing demand.
“I think Russia, Saudi Arabia and OPEC are coming to the conclusion that if they don’t agree to something, it will be forced on them by the market,” said Brian Kessens, a portfolio manager at Tortoise Capital Advisors.
“Any cuts will extend the run way to June instead of May, which is helpful as countries try to work through the coronavirus lockdown. But it only softens the blow.”
One delegate from the producer group said a global cut of ten million barrels a day is a realistic goal. Russian President Vladimir Putin told the country’s top oil executives that producing countries should join together to slash output to reverse the collapse in prices, adding that worldwide curbs of a little above or below 10 million barrels a day are possible.
Meanwhile, President Trump convened an extraordinary gathering of the nation’s biggest refiners and producers at the White House on the 4th April. They were expected to discuss possible relief efforts from the administration, including potential American output cuts.
- West Texas Intermediate for May delivery rose US$3.02 to settle at US$28.34 a barrel on the 4th April
- Global benchmark Brent crude for June settlement jumped 14% to US$34.11 a barrel
- Gasoline futures rose 2.88 cents to 69.16 cents a gallon on the 4th April
Getting countries from all over the world to agree would be a tough task. Even if that’s successful, an output reduction of the size which is being discussed will be just a fraction of the 35 million barrels of daily demand destruction some traders now see.
Citigroup Inc and Goldman Sachs Group Inc have argued any supply-reduction deal would anyway be too little, too late as consumption craters due to efforts to stem the spread of the coronavirus.
“A near-term return to production cuts still seems unlikely, and we are sceptical that such a large coalition could be put together,” Morgan Stanley analysts wrote in a note. Some of the necessary production shut-ins are likely to occur in the US due purely to market forces.
The announcement of a potential supply cut first came from Mr Trump, who tweeted on the 3rd April that he had spoken to Saudi Crown Prince Mohammed bin Salman, who had in turn spoken with Mr Putin.
However, the US leader’s goal is purely aspirational and will ultimately hinge on whether Riyadh and Moscow can reach a deal, a person familiar with the situation said.
Apart from benchmark futures, hopes for the curbs have boosted every corner of the market over the last 24 hours, from time spreads used to gauge market health, to key North Sea swaps. Those gains are now easing as traders worry that the undertaking may be too fraught with hurdles.
The physical oil market of actual barrels of crude continued to remain under pressure, giving producers more urgency to act. Belarus said Russian companies are offering Urals oil for US$4 a barrel.
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