In the coronavirus-engulfed oil market, giant production cuts produce waves, not big waves

SINGAPORE (Reuters) – Minimal oil price gains on Monday show record production cuts by giant producers that will still leave them with a mountain to climb to restore market balance, industry observers said, with the Coronavirus pandemic decimating demand just as stocks rise.

The day after the Organization of the Petroleum Exporting Countries (OPEC) and Russia-led allies agreed to cut production by 9.7 million barrels per day (bpd) in May and June, equivalent to nearly 10% of global supply, prices rose 1% on average, remaining 50-60% below the year to date.

That headline cut by the grouping known as OPEC + may be more than four times as deep as the previous record set in 2008, and may provide a floor for prices according to some analysts, but the reduction is still dwarfed by falling demand. from nearly 30 million bpd in April already forecast by forecasters like Goldman Sachs.

In addition, the governments of countries around the world are considering extending travel closure and social blockade measures that have reduced fuel use to prevent the spread of the coronavirus.

“Even if these cuts provide a floor for prices, they will not be able to increase prices given the scale of the inventory constructions we are still looking at,” Energy Aspects analyst Virendra Chauhan said, referring to storage tanks and ships in everyone getting full. fast amid falling end-user demand.

“The absence of tough commitments by the United States or other G20 members is (a) a deficiency of the agreement.”

(GRAPH: World oil prices fell 50% -60% this year, here)

G20 nations were urged to help reduce oversupply, and non-OPEC producers are expected to contribute to production cuts by another 5 million bpd, but there was little producer commitment after talks on Friday between the group’s energy ministers and Saudi Arabia.

Although the OPEC + agreement is helping to stabilize the world oil market, “the agreement failed to achieve the levels of reduction anticipated by the market, causing oil prices to remain stagnant,” said Takashi Tsukioka, president. of the Japan Petroleum Association (PAJ). in a sentence.

“We hope that OPEC + will continue its talks to stabilize oil markets,” he said.

Meanwhile, analysts said that while the core number in the deal suggests a cut of nearly 10 million bpd, producers in the Middle East such as Saudi Arabia, the UAE and Kuwait will likely have to cut more than 23% of the cut to which they subscribed, as they had started to increase production in April amid a price war before the deal was reached.

This “headline” deal of 9.7 million b / d represents a 12.4 million bpd cut in OPEC + output in April (given the current surge in Saudi Arabia, the United Arab Emirates, Kuwait) but only a cut 7.2 million bpd from 1Q20 average production levels, “analysts at Goldman Sachs said.

FOCUS ON RESERVATIONS

The next major focus for markets is looking at the numbers from the US Department of Energy. USA To fill its strategic oil reserves (SPR) with a drop in demand.

A veteran Singapore oil trader, who declined to be named due to company policy, said inventory will continue, albeit at a slower pace due to the OPEC + cut.

“Most SPRs (held by countries around the world) are already quite full. China probably still has some room, but the rest, I doubt there is anything significant, “he added.

Highlighting the shortage of available storage capacity, Australia’s Minister of Energy and Emission Reduction Angus Taylor said Monday that the country is working on an agreement to buy oil and store it in the US SPR. USA

China, the world’s largest oil importer, remains an outlier: its refineries will increase crude oil production by 10% this month from March, as the country where the coronavirus originated late last year is recovering of the outbreak faster than elsewhere.

“China is unlikely to make a firm commitment, especially as consumers in the Far East continue to pay a premium for supplies from the Middle East compared to Western consumers,” an official with the Beijing-based state-owned oil company said on condition anonymous, citing company policy.

“Outside of the government’s reserve reserve, which is highly protected information, commercial reserve managers of national oil companies will only look at the economy and available storage space to decide on purchases,” the official said, referring to departments of commercial reserves under the state refiner Sinopec and PetroChina.

These reserve shopping malls under large state administrations operate independently of the SPR, the official said, as they often act as an alternative supplier to state oil refineries by lending crude oil to plants at a higher price and making a profit by recovering them at lower cost.

“China may be recovering, but China needs to export products to balance (its market) and therefore will ultimately be limited given that it is a demand, not a supply, issue,” said Chauhan, an analyst at Energy. Aspects.

Elsewhere, India is diverting 19 million barrels of Middle East oil from state-owned companies to SPR to help refineries get rid of extra oil as its storage units are full, three sources said, who declined to be identified, citing. company policy.

(GRAPH: Brent raw direct curve – here)