(C) Reuters. FILE PHOTO: The sun sets behind a crude oil pump jack on a drill pad in the Permian Basin in Loving County
By Florence Tan
SINGAPORE (Reuters) – Falling oil prices on Monday showed that oil producers still have a mountain to climb despite record output cuts in an effort to restore market balance as the coronavirus pandemic shreds demand and sends stockpiles soaring, industry watchers said.
A day after the Organization of the Petroleum Exporting Countries (OPEC) and allies led by Russia agreed to reduce output by 9.7 million barrels per day (bpd) in May and June – equal to nearly 10% of global supply – prices were little changed, oscillating in and out of positive and negative territory. [O/R]
The headline cut by the producer group known as OPEC+ may be more than four times deeper than the previous record set in 2008 and could provide a floor for prices, but the reduction remains dwarfed by a demand drop predicted by some forecasters to be as much as 30 million bpd in April.
What’s more, governments around the globe are considering extending travel and social lockdown measures to prevent the coronavirus from spreading.
“Even if these cuts provide a floor to prices they will not be able to boost prices given the scale of inventory builds we are still staring at,” Energy Aspects analyst Virendra Chauhan said, referring to fast-filling storage amid the slide in demand from end-users.
“The absence of hard commitments from the United States or other G20 members is (a) shortcoming of the deal.”
Graphic – Global oil prices down 50%-60% this year: https://fingfx.thomsonreuters.com/gfx/ce/qzjvqdngpxm/Pasted%20image%201586752163806.png
G20 nations have been urged to help to reduce the supply glut, with non-OPEC producers expected to contribute to output cuts by another 5 million bpd, but there was little commitment after talks on Friday between energy ministers from the group and Saudi Arabia.
While the OPEC+ agreement is helping to stabilise the global oil market, “the deal failed to reach the reduction levels anticipated by the market, leading to oil prices remaining stagnant”, Takashi Tsukioka, president of the Petroleum Association of Japan (PAJ), said in a statement.
“We hope OPEC+ will continue their talks to stabilise oil markets,” he said.
Meanwhile analysts said that while the core number in the deal suggests a near 10 million bpd cut, Middle East producers such as Saudi Arabia, the United Arab Emirates and Kuwait will likely have to reduce by more than the 23% cut to which they signed up, as they had begun to ramp up output in April in a price war before the agreement was struck.
“This 9.7 million bpd ‘headline’ deal represents a 12.4 million bpd cut from claimed April OPEC+ production (given the Saudi, UAE, Kuwait ongoing surge) but an only 7.2 million bpd cut from 1Q20 average production levels,” Goldman Sachs (NYSE:GS) analysts said.
Graphic – Brent 6-month contango steeper after global output cut deal: https://fingfx.thomsonreuters.com/gfx/ce/jbyprbeqpeo/Brent%20contango.png
FOCUS ON RESERVES
However, energy analysts at FGE expect oil stockpiles in developed nations to grow in the second quarter to levels last seen in 1982.
The next major focus for markets is watching for numbers from the U.S. Department of Energy on its strategic petroleum reserves (SPR).
A veteran Singapore oil trader, who declined to be named due to company policy, said inventory build will continue, albeit at slower pace because of the OPEC+ cut.
“Most of the SPR (held by countries around the world) are pretty full already. Probably China still has some room, but the rest, I doubt there is anything significant,” he added.
Highlighting the scarcity of available storage capacity, Australia’s Energy and Emissions Reduction Minister Angus Taylor on Monday said that the country is working on an agreement to buy oil and store it with the U.S. strategic reserves.
China, the world’s largest oil importer, remains the outlier. Its refiners are set to raise crude oil throughput this month by 10% from March as the country where the coronavirus originated at the end of last year recovers from the outbreak faster than elsewhere.
“China is unlikely to make any firm commitment, especially as Far East consumers are still paying a premium for Mideast supplies versus western consumers,” one Beijing-based state oil company official said on condition of anonymity, citing company policy.
“Outside the government reserve stockpiling, which is highly guarded information, commercial reserve managers at national oil firms will only look at the economics and tankage space available to decide purchases,” said the official, referring to commercial reserve departments under state refiner Sinopec and PetroChina.
These commercial reserve centres operate independently from the SPR, the official said, and often act as a swing supplier to state oil refineries by loaning crude to plants at a higher price and making a profit when retrieving them at a lower cost.
“China may be recovering, but China needs to export product to balance (its market), and therefore will ultimately be constrained given this is a demand, not supply-led issue,” said Energy Aspects analyst Chauhan.
Elsewhere, India is diverting 19 million barrels of Middle East oil from state-run companies to SPRs to help refiners to offload surplus oil, three sources said, declining to be identified, citing company policy.
Graphic – Brent crude forward curve: https://fingfx.thomsonreuters.com/gfx/ce/nmovabwepab/Pasted%20image%201586754436010.png