Oil rises 3% on hopes for output cut as coronavirus ravages demand

CNBC

Reuters
KEY POINTS
  • Brent crude was up by 93 cents, or 2.8%, at $33.98 a barrel by 0431 GMT after falling more than 3% on Monday.
  • U.S. crude was up by 79 cents, or 3.03%, at $26.87 a barrel, having dropped nearly 8% in the previous session.
GP: Oil Pumping Jacks
Oil pumping jacks, also known as “nodding donkeys”, operate in an oilfield near Almetyevsk, Tatarstan, Russia, on Wednesday, March 11, 2020.
Andrey Rudakov | Bloomberg via Getty Images

Oil prices gained on Tuesday as hopes rose that the world’s biggest producers of crude will agree to cut output as the coronavirus pandemic crushes demand, even as analysts warn a global recession may be deeper than expected.

Brent crude was up by 93 cents, or 2.8%, at $33.98 a barrel by 0431 GMT after falling more than 3% on Monday. U.S. crude was up by 79 cents, or 3.03%, at $26.87 a barrel, having dropped nearly 8% in the previous session.

The world’s main oil producers including Saudi Arabia and Russia are likely to agree to cut output at a meeting on Thursday, although that would depend on the United States doing its share, sources told Reuters.

But the threat of a major recession hangs over the market due to the halt of much economic activity as a result of the coronavirus pandemic, with half the global population under some form of lockdown or social distancing measures.

“Oil producers have to cut deeply and quickly if they want to avert total saturation of oil markets,” Eurasia Group said.

Worldwide oil demand has dropped by as much as 30%, or about 30 million barrels per day, coinciding with moves by Saudi Arabia and Russia to flood markets with extra supply after an agreement on withholding output fell apart.

Oil prices slumped on Monday after Saudi Arabia and Russia delayed a meeting to agree on output cuts till Thursday.

The Organization of the Petroleum Exporting Countries (OPEC) and other producers including Russia, a grouping known as OPEC+, had been curtailing production in recent years amid a rapid expansion of U.S. output that made the country the world’s biggest crude producer.

There are also questions over whether the U.S. would join any coordinated action.

U.S. President Donald Trump said on Monday that OPEC had not asked him to push domestic oil producers to cut their production to buttress prices. He also said that U.S. output was declining in response to falling prices.

“I think it’s happening automatically but nobody’s asked me that question yet so we’ll see what happens,” the president told a press briefing on Monday afternoon.

Coordinated action by U.S. oil producers to reduce output would typically be a violation of antitrust laws.

A global recession that economists in a Reuters poll say is under way will likely be more serious than expected a few weeks ago due to the viral outbreak, the latest survey showed.

“We expect energy prices to hover around current levels until economic activity recovers,” Capital Economics said in a note.

Oil prices could plunge below $20 a barrel this quarter as demand craters: CNBC survey

KEY POINTS
  • Crude oil prices could plunge below $20 a barrel in the second quarter, according to nearly a third of respondents in a CNBC survey of 30 analysts, strategists and traders.
  • Some analysts believe crude oil prices could fall to as low as $10 a barrel as the coronavirus outbreak has severely dented demand.
  • Analysts are also skeptical that Saudi Arabia and Russia will agree to major cuts in supply.
GP: Oil storage 200403 Asia
Oil storage tanks stand at the RN-Tuapsinsky refinery, operated by Rosneft Oil Co., in Tuapse, Russia, on Monday, March 23, 2020.
Andrey Rudakov | Bloomberg | Getty Images

The oil price bust may not be over.

A historic demand shock sparked by the coronavirus pandemic is set to worsen in the current quarter, undermining any coordinated effort by heavyweight producers Saudi ArabiaRussia and the United States to cut supply aggressively and rebalance the market, according to a CNBC survey of 30 strategists, analysts and traders.

Episodic spikes of $20 a barrel or more in benchmark crude oil futures of the type seen last week cannot be ruled out as rivals Saudi Arabia and Russia attempt to reverse a damaging battle for market share and engineer a global supply deal which could cut up to 15 million barrels a day, the equivalent of about 10% of global supply.

But such price rallies are unlikely to last, according to the findings of the CNBC survey conducted over the past two weeks.

Brent crude futures, the barometer for 70% of globally trade oil, are likely to average $20 a barrel in the current quarter, according to the median forecast of 30 strategists, analysts and traders who responded to a CNBC survey, or 12 out of 30 respondents.

However, nearly a third, or nine of those surveyed, said prices may drop below $20 a barrel this quarter.

Amongst the more pessimistic projections, ANZ’s Daniel Hynes saw the risk of prices in the ‘mid-teens’ while JBC Energy’s Johannes Benigni warned that both Brent and US crude futures could ‘temporarily’ fall to around $10 a barrel.

New normal

The Organization of Petroleum Exporting Countries (OPEC), the supplier of a third of the world’s oil, and its rivals outside the group are “of pretty limited relevance in this context, as they are neither likely to be willing nor able to stem the current demand shock,” Benigni said.

Bearish forecasters said two forces would keep oil prices depressed in the second quarter — skepticism that Saudi Arabia and Russia would relent in their price war and commit to the deepest cuts in the producer group’s history (with or without participation from U.S. shale producers) and a glut in the current quarter caused by a monumental collapse in global demand as the full economic severity of the global coronavirus pandemic unfolds.

“A demand drop of 10% is the New Normal with oil,” said John Driscoll, director of JTD Energy Services in Singapore and a former oil trader whose career spans nearly 40 years.

Global commodities trader Trafigura’s chief economist Saad Rahim offered a starker prediction. Oil demand could fall by more than 30 million barrels a day in April, or around a third of the world’s daily oil consumption, Reuters reported on March 31, citing his forecasts.

And even if Saudi Arabia, its OPEC allies and major producers outside the group such as Russia and the U.S. did agree on aggressive supply restraint, it’s unlikely to materially drain global inventories that are closing in on what the oil industry calls ‘tank tops’, or storage capacity limits.

Too little, too late

“The long and short of it is that the current rally will likely be short lived,” Citigroup’s oil strategists led by Ed Morse said in an April 2 report.

“The big three oil producers may have found a way to work together to balance markets, but it looks like it is too little too late. That means prices would have to fall to the single digits to facilitate inventory fill and shut in production.”

Fatih Birol, executive director of the International Energy Agency said oil inventories would still rise by 15 million barrels a day in the second quarter even with output cuts of 10 million barrels a day, Reuters reported on April 3.

Citi expects Brent to average $17 a barrel in the current quarter and warned Moscow, Riyadh and Washington “cannot in the end stop prices from possibly falling below $10 before the end of April.”

Plus, travel restrictions, border closures, lockdowns and economic disruption caused by ‘social distancing’ and other measures taken by governments globally to slow the spread of the virus will exact a heavy toll on oil demand and could even linger when the virus clears, clouding the prospects of a recovery.

“As for the second quarter or even the third, I don’t see a V-shaped recovery for prices,” said Anthony Grisanti, founder and president of GRZ Energy, who has over 30 years of experience in the futures industry.

“The longer people are shut in the more likely behaviour will change…I have a hard time seeing oil above $30-35 a barrel over the next 6 months.”

Negative pricing

Standard Chartered oil analysts Paul Horsnell and Emily Ashford said they expect “an element of persistent demand loss that will continue after the virus has passed, driven by permanent changes in air travel behavior and the demand implications of businesses unable to recover from the initial shock.”

With demand at near-paralysis, oil and fuel tanks from Singapore to the Caribbean are close to brimming – stark evidence of the global glut.

Global oil storage is “rapidly filling – exceeding 70% and approaching operating max,” said Steve Puckett, executive chairman of TRI-ZEN International, an energy consultancy.

Citi’s oil analysis team and JBC Energy’s Johannes Benigni even warned of the risk of oil prices turning negative if benchmarks drop below zero, effectively meaning producers pay buyers to take the oil off their hands because they’ve run out of storage space.

“Theoretically, the unprecedented stock-build might mean negative oil prices in places, should the world or some regions run out of storage and if higher-cost production is stickier than thought,” Citi analysts said.

Despite the bearish consensus, nine survey respondents held a more constructive view. Within that group, six forecasters expected Brent crude prices to stabilize around the mid-to-late twenties in the second quarter while one called for $30 a barrel.

Tony Nash, founder and chief economist at analytics firm Complete Intelligence, and independent energy economist Anas Alhajji topped the range at $42- and $44 a barrel, respectively.

U.S. shale producers, who need $50 to $55 a barrel crude oil to just break-even, are struggling to maintain operations in a depressed price environment. That’s led to cutbacks in production and capital spending, job losses and bankruptcies across the U.S. shale industry and globally.

The oil market is underestimating such a shake out and its future impact on rebalancing the global oversupply, Alhajji said.

“Shut-ins are already taking place. Companies made major spending cuts and many will cut again.”

Markets are also downplaying the extent of the post-virus rebound on oil demand, Alhajji and Nash claimed, though determining the endpoint to the pandemic is near-impossible.

“We expect initial excitement over demand in May as the West comes back online, then it falls slightly as expectations are moderated going into June,” Complete Intelligence’s Nash said.

Saudi energy minister rejects Russian comments about kingdom’s withdrawal from OPEC+ deal

REUTERS

CAIRO (Reuters) – The Saudi energy minister on Saturday rejected Russia’s remarks that the kingdom withdrew last month from a deal to cut output.

Prince Abdulaziz bin Salman was responding to comments made by his Russian counterpart on Friday, according to a statement carried by Saudi state news agency SPA.

“The Russian Minister of Energy was the first to declare to the media that all the participating countries are absolved of their commitments starting from the first of April, leading to the decision that the countries have taken to raise their production to offset the lower prices and compensate for their loss of returns,” Prince Abdulaziz said in a statement.

Oil futures pare record gains as doubts creep in on Trump’s Saudi-Russia output deal

CNBC

Reuters
KEY POINTS
  • Brent crude futures fell 3%, or 9 cents, to $29.05 as of 0127 GMT, after having soared 21% on Thursday.
  • U.S. West Texas Intermediate (WTI) crude futures fell 5.2%, or $1.32, to $23.98 a barrel, after having surged 24.7% on Thursday.
GP: Oil Pumping Jacks
Oil pumping jacks, also known as “nodding donkeys”, operate in an oilfield near Almetyevsk, Tatarstan, Russia, on Wednesday, March 11, 2020.
Andrey Rudakov | Bloomberg via Getty Images

Oil prices fell on Friday, coming off their biggest one-day gains in the previous session after U.S. President Donald Trump said he had brokered a deal between Saudi Arabia and Russia to cut output, but made no offer to reduce U.S. production.

Brent crude futures fell 3%, or 9 cents, to $29.05 as of 0127 GMT, after having soared 21% on Thursday.

U.S. West Texas Intermediate (WTI) crude futures fell 5.2%, or $1.32, to $23.98 a barrel, after having surged 24.7% on Thursday.

Friday’s drop reflected market skepticism over whether a deal to call off a damaging Saudi-Russian price war would go ahead if there was no cooperation from other producers including the United States. Trump told reporters at the White House late on Thursday he had made no offer to cut U.S. output.

“Both Riyadh and Moscow will also be looking for participation from U.S. producers, and this may prove now to be the biggest obstacle to an agreement,” Royal Bank of Canada analysts said in a note.

Trump said he had spoken with both Saudi Crown Prince Mohammed bin Salman and Russian President Vladimir Putin on Thursday, and said he expected they would cut oil output by as much as 10 million to 15 million barrels per day (bpd).

Even with the huge gains on Thursday, prices have still slumped nearly 60% this year as oil demand has plummeted due to the coronavirus pandemic slashing demand even as Saudi Arabia and Russia said they would boost output in April amid their price war, raising the prospect of a flooded market.

Analysts said even if Russia and Saudi Arabia agreed to cut production by as much as 15 million bpd, that would not be enough to balance the market in face of a deep economic recession.

“The 10-15 million bpd oil production cut reportedly being brokered by President Trump is a great start, but deeper cuts will likely be needed to get through a difficult Q2,” said Stephen Innes, chief global market strategist at AxiCorp.

A deal between Russia and Saudi Arabia could effectively establish a floor for WTI in the $30s, he said.

With the coronavirus pandemic worsening, the global market is facing a huge oversupply of around 25 million bpd. Cutting 10 million bpd of supply would at least help ease a shortage of crude storage capacity, Rystad Energy said.

“Running out of storage capacity would result in a complete collapse of the oil market,” Rystad’s head of analysis, Per Magnus Nysveen said.

Oil jumps as Trump talks up truce hopes for Saudi-Russia price war

CNBC

Reuters
KEY POINTS
  • Brent crude futures rose 5.9%, or $1.46, to $26.20 as of 0418 GMT.
  • U.S. West Texas Intermediate (WTI) crude futures were up 4.6% or 94 cents, at $21.25.
GP: Saudi Aramco oil processing facility in Saudi Arabia 200310 EU
A worker at an oil processing facility of Saudi Aramco, a Saudi Arabian state-owned oil and gas company, at the Abqaiq oil field.
Stanislav Krasilnikov | TASS | Getty Images

Crude oil futures surged on Thursday after U.S. President Donald Trump said he expected Saudi Arabia and Russia to reach a deal soon to end their oil price war and Russian President Vladimir Putin called for a solution to “challenging” oil markets.

Brent crude futures rose 5.9%, or $1.46, to $26.20 as of 0418 GMT, while U.S. West Texas Intermediate (WTI) crude futures were up 4.6% or 94 cents, at $21.25.

Trump said he had talked recently with the leaders of both Russia and Saudi Arabia and believed the two countries would make a deal to end their price war within a “few days” — lowering production and bringing prices back up.

He also said he would be meeting with oil executives, where he is expected to discuss a range of options to help the industry amid the sharp hit to demand as the coronavirus outbreak has hammered industrial activity and kept cars off the road.

Speaking at a government meeting on Wednesday, Putin said that both oil producers and consumers should find a solution that would improve the “challenging” situation of global oil markets.

Some analysts cautioned there is still a long way to go before any output cut agreement is struck.

With markets facing 15 million barrels per day (bpd) of oversupply in the second quarter and storage maxing out in April, extraordinary curtailments of oil supply will be needed in May and June, said Kang Wu, head of Asia analytics at S&P Global Platts.

Brent prices need to drop to low-$10 per barrel to force immediate supply curtailment, he added, forecasting global oil demand to decline around 4.5 million bpd this year.

Research firm Rystad Energy estimates global crude oil demand in April will fall nearly 23% year-on-year to 77.6 million bpd.

Saudi Arabia’s crude supply rose on Wednesday to a record of more than 12 million barrels per day, two industry sources said, despite a plunge in demand and U.S. pressure on the kingdom to stop flooding the market.

“This is a clear sign that the Saudis are not ready to back off in the price war, despite the Russians now saying that they will not increase output given the current oversupply in the market,” ING said in a research note on Thursday.

U.S. crude stockpiles rose 13.8 million barrels in their biggest weekly increase since 2016 and analysts expected stocks to keep rising as refineries curb output and gasoline demand falls.

“At the current price, many U.S. oil exploring energy companies won’t be able to make a profit and drilling activities might fall in North America,” CMC Markets analyst Margaret Yang said.

U.S. shale producer Whiting Petroleum Corp, once the largest oil producer in North Dakota, on Wednesday became the first publicly traded casualty of the oil price collapse as it filed for Chapter 11 bankruptcy.