Oil moves higher with impact of possible output cuts in focus

Oil rose after a two-day drop as investors weighed whether output cuts being discussed by the world’s top producers will be enough to offset the demand destruction wrought by the coronavirus.

Futures in New York climbed around 6% to above $25 a barrel after losing a sixth of their value over the previous two sessions. Saudi Arabia and Russia are hammering out an agreement that a delegate said will reduce global output by about 10 million barrels a day. That compares with Opec’s estimate for demand to fall by 11.9 million barrels a day this quarter.

Some form of cooperation from the US, the world’s biggest producer, will be required, according to delegates involved in the talks. However, a drop in America’s crude output forecast released Tuesday could be enough to satisfy Riyadh and Moscow. The Energy Information Administration said it expects production to average 11.76 million barrels a day in 2020, down from a previous projection of 12.99 million.

President Donald Trump said on Fox News that he’d talked with the Saudi and Russian leaders and that he expected the ongoing global oil negotiations would “work out.” Industry consultant FGE was less optimistic, however, saying the risk is heavily skewed to no deal happening. Only massive cuts toward the upper end of the 10 to 15 million barrel a day range would come close to addressing the imbalance, it said in a note dated April 7.

The Opec+ meeting will be held Thursday afternoon Vienna time, while a G-20 meeting of energy ministers will follow a day later. If a deal can’t be reached or if it fails to stem the rout in oil prices this year, things could get ugly. Almost 40% of US producers face insolvency within the year if crude stays near $30 a barrel, according to a Federal Reserve Bank of Kansas City survey.

“A cut of 10 million barrels per day would be significant and would lend some support to prices,” said Howie Lee, an economist at Oversea-Chinese Banking in Singapore. “However, without US participation, other producers may not have strong incentives to cut output by such an extent.”

West Texas Intermediate for May delivery rose 6.4% to $25.15 a barrel on the New York Mercantile Exchange as of 1:35 p.m. in Singapore. It fell almost 17% over Monday and Tuesday.

Brent for June settlement climbed 3.3% to $32.91 a barrel on the ICE Futures Europe exchange after dropping 7% in the first two days of the week. The global benchmark traded at a $2.65 premium to WTI for the same month.

The EIA said it expects US production to drop to just over 11 million barrels a day next year from around 13 million now. The forecast demonstrates that there are already projected cuts of 2 million barrels a day, without any intervention from the federal government, an official at the US Energy Department said.

In a sign of the growing energy glut in the world’s largest economy, the American Petroleum Institute reported stockpiles rose by 11.9 million barrels a day last week, according to people familiar with the data. Inventories at the Cushing, Oklahoma storage hub climbed by 6.8 million barrels, the API said, which would be the biggest build in data going back to 2004 if confirmed by EIA figures due later on Wednesday.

Other oil-market news

  • Investors looking to call the bottom of oil’s plunge are helping prop up futures prices even as the physical market slumps.
  • Traders and oil majors have made a flurry of bookings for tankers on time charters over the past two weeks as a favourable market structure makes it possible to cash in on a growing glut.
  • With oil storage tanks stuffed from Savannah to San Francisco, one company is proposing a novel solution for stowing your excess barrels of bitumen, asphalt and grease: Stick it in a bag.
  • Crude futures declined 1% to 294.8 yuan a barrel on the Shanghai International Energy Exchange after advancing 5% on Tuesday.

© 2020 Bloomberg

Source: moneyweb.co.za