Global oil cuts of 10-15 mln bpd ‘only temporary support’ for prices: Experts

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Oil prices have been under pressure as the coronavirus pandemic has severely curtailed demand for petroleum products.

Meetings of the Organization of the Petroleum Exporting Countries (OPEC) and allied nations including Russia on Thursday and energy ministers from the Group of 20 on Friday have sought to put in place massive cuts in oil supply.

OPEC agreed a 10 million barrel per day (bpd) cut for two months on Thursday, contingent on the participation of Mexico, which has so far resisted calls to make a 400,000 barrels per day cut. OPEC expects an additional 5 million bpd cut by other producers. G20 nations voiced support for oil market stabilization but stopped short of mentioning specific numbers for cuts.

Al Arabiya English asked various experts for their outlook on what comes next:

Jeffrey Halley, senior market analyst at trading firm OANDA.

The deal between Mexico and USA seems strange in that President Trump has not explained where his 250,000 barrels of cuts on behalf of Mexico are coming from. Or indeed, whom he could legally order to cut those barrels of production in the USA.

The next step appears to be a meeting today between Mexico and Saudi Arabia to convince the Saudis this is an acceptable compromise. I expect them to reluctantly accept this deal for now thanks to some heavy-duty arm twisting behind the scenes.

Should the whole deal fall apart, the result will be obvious, oil will collapse on Monday and I would expect Brent to fall to near $25 a barrel, possibly lower.

The entire deal is still underwhelming and still leaves a surplus of at least 10 million barrels a day of production the world can’t absorb. Also the OPEC+ group got precisely zero commitments from major producers outside. Namely Canada and the US.

Cyril Widdershoven, Director of Verocy and Global Head Strategy and Risk of Berry Commodities Fund

The current situation is very clear, at least when you look at fundamentals. OPEC+ and G20 will not be able to manage the market when there is a demand destruction of 17-25 million bpd. The current discussions to take around 10-15 million bpd will be only a temporary support for prices, as overall glut still exists.

The only situation at present is that we will see a slowdown of storage being filled to the ceiling. At the same time, when the market starts to understand this, prices will most probably will decline again, as the impact of the coronavirus will be much higher and last for longer than we expect at present.

Also, you need to consider until now no real compliance has ever been in the market, as most OPEC producers are not keeping to their commitments. The only ones having it done again are Saudi Arabia, UAE and Kuwait. The remaining countries are always playing the rules or delaying cuts.

For the USA, nothing is happening, even with an agreement, as Washington is not able to force its producers to cut. To take additional shale oil volumes into the strategic petroleum reserve is only a temporary relief to the market and doesn’t change the total fundamentals. Until US producers are facing bankruptcy, the market will be under pressure. Taking out 2-4 million bpd of shale oil is needed to stabilize market.

Louise Dickson, oil markets analyst, Rystad Energy

The collaboration and size of the proposed OPEC++ cut is unprecedented, so it makes sense both OPEC and G20 are taking their time before any dam-busting announcement. But the oil market does not have time to spare. Some countries have communicated they have pledged shut-ins of millions of barrels of oil, which, if the deal is implemented in May, makes full compliance not feasible.

Even if in some perfect world we see full OPEC++ compliance and 10 million bpd in cuts, this still leaves an incredible minimum 10 million bpd supply overhang for 2Q20.

The proposed OPEC++ cuts alone cannot reverse the deep contango curve of Brent prices in a meaningful or lasting way as storage is needed to remain economical to handle the current and still coming oversupply. So we aren’t sold that the current oil market optimism - with Brent in the low $30s - is warranted, and still believe that we need to see a bigger contango to pay for all the storage that will soon be needed.

Also, do not be so sure about the actual production cut size. We find it very unlikely that the full 10 million bpd cut will be implemented as May 1 is just three weeks away and cuts of that size take time to realize. The oil machine is not as flexible as just simply turning off the tap or pressing a button.

Roger Diwan, Vice President of IHS Markit

First, they need to sort out the issue of Mexico. They are trying to do something that has never been done before. It’s a huge and very difficult task. They have made a good start but there is a long road ahead. There is a huge job of coordination compared to what has been done in the past. They will avoid a really massive build in stocks.

Omar Al-Ubaydli, Researcher at Derasat

Even if a deal is done and the Mexico issue is dealt with, it will be difficult to enforce and it has never been done before. Monitoring and compliance will be very challenging.

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