Much-vaunted output cut of crude oil by OPEC+ is a damp squib

After all the machinations and drama the group of countries known as OPEC+ finally got their act together and announced over the weekend a crude oil output cut of historic proportions. They agreed to reduce their production by 9.7 million barrels per day (BPD), the single-largest cut ever. Unfortunately, it did little for oil prices.

West Texas Intermediate crude for May delivery lost 35 cents, or 1.5%, to settle at $22.41 a barrel on the NYMEX. June Brent crude the global benchmark, climbed by 26 cents, or 0.8%, at $31.74 a barrel on ICE Futures Europe.

Oil market ho-hum on OPEC+ deal

The price movement suggests the oil market shrugged off the production deal as a non-event and doing little to balance the massive destruction of demand due to the coronavirus pandemic. An estimated 30 million BPD of oil demand has evaporated in April in the aftermath of the health disaster and its economic repercussions.

Front-and-center again is the likelihood that the rising crude inventories will soon tap out the global oil storage capacity. This could lead to a fresh downswing in oil prices, according to analysts at Goldman Sachs.

“Ultimately, this simply reflects that no voluntary cuts could be large enough to offset the 19 million BPD average April-May demand loss due to the coronavirus. We, therefore, reiterate our view that inland crude prices will decline further in coming weeks as storage capacity becomes saturated and expect further weakness in WTI time spreads and crude prices in coming weeks, as already presaged on Friday, with downside risks to our short-term $20/bbl forecast,” said the analysts.

“While the deal will lend support down the curve, we expect Dated Brent to trade a substantial discount to front-month ICE future, meaning that the benefits for OPEC+ look somewhat uncertain,” said Chris Midgley, global head of analytics for S&P Global Platts.

Did the price war end?

Meanwhile, the Energy Information Administration said Monday that US shale oil production will fall to 8.53 million BPD in May, down 183,000 BPD from April.

According to rough math, post the OPEC+ weekend deal, there could another cut in supplies by about 10 million BPD due to other factors. These include finance-related production outages in the U.S. and Canada, more cuts by Brazil, Norway, and other countries, and strategic petroleum reserve (SPR) buying.

“Having been involved in the negotiations, to put it mildly, the number that OPEC+ is looking to cut is 20 Million Barrels a day, not the 10 Million that is generally being reported,” tweeted President Trump.

Unfortunately, the oil price war may not have ended. Saudi Arabia, which had kept its oil pricing for May under wraps pending the OPEC+ confabulations, on Monday cut the price of its Arab Light crude grade to Asia by another US$4.20 per barrel compared to April. However, it raised prices for the U.S. “The global market remains very oversupplied,” said Ole Hansen, head of commodity strategy at Saxo Bank to Bloomberg. “Aramco is still prepared to fight for its market share. While the U.S. hike is symbolic, the real challenge, in terms of maintaining market share, can be seen through the lower OSP to Asia.”