NEW YORK/LONDON (Reuters) – OPEC and other major oil producers on Thursday discussed potential big output cuts in the face of a huge fall in demand due to the coronavirus crisis.
FILE PHOTO: A sticker reads crude oil on the side of a storage tank in the Permian Basin in Mentone, Loving County, Texas, U.S. November 22, 2019. REUTERS/Angus Mordant
The Organization of the Petroleum Exporting Countries and other producers including Russia, a group known as OPEC+, began a meeting on Thursday, which was expected include discussion of record cuts equivalent to 10% to 15% of global supplies, although demand has plunged by up to 30%.
Analysts say that, even if such record cuts are agreed, theywill not be enough.
The group agreed in principle for a 10 million-barrel-per-day cut for May and June, according to three OPEC+ sources. The group plans for OPEC+ to cut 10 million barrels per day and other nations to cut 5 million barrels, one source told Reuters.
Michael Tran, managing director of energy strategy at RBC Capital Markets, said: “The market’s muted price reaction is a sobering indicator of the headwinds that remain, namely demand destruction. An acute near-term surge in crude prices would cripple refining economics and result in further run cuts.”
Sandy Fielden, director of oil and products research, said: “Usual expected drama so far. Cuts talk all well and good but ‘Who, what, when and where’ is what actually matters. Plus the G20 role is still a mystery.”
Roger Read, senior energy analyst, said: “Until the extreme social distancing / economic shutdown measures are significantly relaxed across North America, Europe and parts of Asia, any OPEC+ supply cuts are simply playing catch-up at best.”
Ethan Bellamy, senior analyst, said: “10 million barrels per day is insufficient to balance the market. … OPEC’s only real choice to bring the U.S. and other higher-cost producers along is to allow price to ration supply. With half a trillion in reserves, we think the Russians can outlast U.S. producers in a fight for market share.”
“If true, the preliminary production cut of 10 million bpd among OPEC+ members is a good first step, but it would still not be enough given the 20 million bpd+ supply overhang expected for the second quarter of 2020.”
“Our updated 2020 global oil balance suggests that a 10million barrels per day (bpd) headline cut (for an effective 6.5million bpd cut in production) would not be sufficient, stillrequiring an additional 4 million bpd of necessary price inducedshut-ins.”
Bob Yawger, Director of Energy Futures, said: “If they cut, it won’t be enough. If they agree to a 10 million barrel (per- day) cut, it will only slow filling of storage. It’s not going to save the day, but it’s better than nothing.”
The bank expects OPEC+ to agree to cut 4.3 million bpd.”While clearly not enough to offset the demand drop … (thecut) would materially lessen the risk of storage being filledand offer a smoother route to working off inventories.”
“The unprecedented decline in demand… means that asuccessful supply response is just a part-mitigant in the short term. Even if producers were to agree to an arrangement thatresults in short term market balance, underlying spare capacitywill rise to historic levels.”
INTERNATIONAL ENERGY AGENCY
The head of the International Energy Agency, Fatih Birol,said a production cut of as much as 10 million bpd would stillresult in a 15 million bpd build up of crude in the secondquarter.
BCS GLOBAL MARKETS
Kirill Tachennikov, director and senior oil analyst at BCSGlobal Markets said: “Even if a 10 million bpd cut is agreed, itis not technically possible to achieve these numbers in lessthan a month, and it is not enough to offset current oversupplythat is exceeding 20 million bpd as it stands. As a result, thechallenges of oil storage gradually filling up is still a veryreal issue.”
“As the OPEC+ virtual meeting kicks off, oil prices extended their gains after reports that Russia and Saudi Arabia have reached a deal on deep oil cuts and that OPEC ++ are talking about cuts as large as 20 million bpd. As is with every OPEC meeting, many plot twists are to be expected.”
Compiled by Ron Bousso and Jessica Resnick-Ault ; Editing by Edmund Blair and Marguerita Choy