Oil falls as investors weigh unprecedented accord on global production cut

Oil surrendered gains after rising in early trading as investors weighed whether an unprecedented deal by the world’s biggest producers to cut output would suffice to steady a market reeling from the coronavirus.

Futures in London were down 0.6% after the Opec+ alliance agreed to slash production by 9.7-million barrels a day starting in May. The group reached a deal after days of intense negotiations after Mexico declined to endorse the original agreement reached on Thursday.

The US, Brazil and Canada will contribute an additional 3.7-million barrels in nominal production cuts as their output declines, and other Group of 20 nations will cut 1.3-million more. The G-20 numbers don’t represent real voluntary cuts but rather the effect that low prices have already had on output, and they would need months, or perhaps more than a year, to take effect.

Saudi Aramco reduced pricing for all its grades to Asia, signalling the state company’s intention to defend sales in its biggest market even while paring output.

“The global market remains very oversupplied, and Aramco is still prepared to fight for its market share,” said Ole Sloth Hansen, head of commodities strategy at Saxo Bank A/S in Copenhagen.

Brent for June delivery was 20c lower at $31.28 a barrel on the ICE Futures Europe exchange as of 4.40pm in Dubai. The contract jumped as much as 8%, or $2.51, earlier in the day. It lost 7.7% last week and has fallen from $66 at the end of 2019.

West Texas Intermediate for May delivery was up 11c, almost unchanged at $22.87 a barrel on the New York Mercantile Exchange, after dropping almost 20% last week.

Futures markets were closed on Friday, so Monday’s pricing reflects the change in values since the end of trading on Thursday, before the G-20 meeting had started.

Oil prices have been in free fall since the middle of February as some of the world’s biggest economies went into lockdown to try to stop the coronavirus from spreading. Whether the Opec+ deal will be enough to steady a market where demand losses may amount to 35-million barrels a day and storage space is rapidly running out remains to be seen. Goldman Sachs Group called the agreement “historic yet insufficient”.

The voluntary reductions by Opec+ would lead to an actual production cut of 4.3-million barrels a day from first-quarter levels, assuming full compliance by core-Opec and 50% by other participants in May, Goldman said in a note. The bank sees demand losses in April and May averaging 19-million barrels a day.

“The deal reduces the oil inventory build from May onward, but doesn’t prevent it,” said Giovanni Staunovo, commodity analyst at UBS Group. “Also, inventories will keep rising sharply over the coming weeks, as the deal starts next month.”

Mexico will reduce output by 100,000 barrels a day, after rejecting its 400,000 barrel-a-day share of the original deal. President Donald Trump helped broker a compromise that allows the Latin American nation to count some of the US market-driven supply decline as its own.

The Opec+ alliance initially met on Thursday via video conference. That was followed on Friday by a virtual gathering of G-20 energy ministers, who pledged to take “all the necessary measures” to maintain a balance between oil producers and consumers.

“The scale of production cuts is a move in the right direction, but considering how badly demand is affected, it was never going to be significant enough to push the market closer to balance,” said Edward Bell, senior director for market economics at Emirates NBD PJSC in Dubai.

“Is Russia going to cut production by 2.5-million barrels a day in two weeks? That’s a pretty steep ask.”

Bloomberg