Oil prices rise 2% after cut output, but demand worries weigh
NEW YORK: Oil prices rose 2% on Monday after a record deal between oil producers to curb the rapid surge in supply, a muted impact on the market as the coronavirus pandemic demands.
The Organization of the Petroleum Exporting Countries (OPEC), along with Russia and other countries, known as OPEC +, agreed over the weekend to reduce production by 9.7 million barrels per day (bpd) in May and June, which representing around 10% of global supply
In addition, several other countries will also cut production, in an estimated total cut of approximately 19.5 million bpd.
Brent futures rose 63 cents, or 2%, to $ 32.11 a barrel at 12:36 pm EDT (1636 GMT), while US West Texas Intermediate (WTI) crude rose 42 cents, or 1.9%, to $ 23.18.
Global fuel consumption has decreased by approximately 30% due to the COVID-19 pandemic that has killed more than 100,000 people worldwide and has kept entire nations locked up.
That is expected to lead to oversupply for months or years even with production cuts. That may limit gains in oil prices, even after the Opec + deal, which took several days of negotiations to complete.
The problem is that the short-term impact of demand is likely in the 30 million bpd area, with oversupply conditions still in place, said Edward Moya, senior market analyst at OANDA in New York. Oil demand will not return to normal levels until 2022.
Saudi energy minister Prince Abdulaziz bin Salman said the G20 group nations had pledged to cut around 3.7 million bpd and that purchases of strategic reserves would reach approximately 200 million barrels in the next two months, taking the total reduction to approximately 19.5 million bpd.
Saudi Arabia, Kuwait and the United Arab Emirates volunteered to make even deeper cuts than agreed, effectively reducing Opec + supply by 12.5 million bpd from current levels.
The kingdom also set its official crude oil sales prices (OSP) for May on Monday, selling oil to Asia cheaper and keeping prices flat for Europe, while raising them for the United States.
Still, analysts question producers' likely compliance with production cuts, especially since Mexico achieved smaller cuts than initially required.
Even with full compliance in mind, concern about weak demand served to control earnings.
Extreme losses on the demand side have only been hinted at in much of the official data so far, analysts at JBC Energy said in a note.
Outside of Opec +, Canada has expressed its readiness to cut and Norway said it will decide on its cut in the near future.
The United States, where antitrust legislation makes it difficult to act in concert with groups like OPEC, has said that low prices mean its output would already drop to 2 million bpd this year without planned cuts.
The crude futures contango, the market structure in which post-dated prices are higher than immediate supplies, expanded, showing some optimism about the long-term impact of the OPEC + cuts, but also current concerns about oversupply.
The WTI second month premium over the previous month increased to its highest level since February 2009 for the fourth consecutive day.