UPDATE 16-Oil slumps, investors say OPEC supply cuts won't be enough
9 April 2020 15:51
Copyright 2020 Thomson Reuters. All Rights Reserved.
By Scott DiSavino
NEW YORK, April 9 (Reuters) - Oil prices slumped on Thursday, giving back an earlier 10% surge as investors doubted the emerging supply-cut agreement between members of OPEC and its allies would adequately address the global fuel demand collapse caused by the coronavirus pandemic.
Oil producers led by Saudi Arabia and Russia were hammering out an agreement to address growing oversupply amid a 30% drop in worldwide fuel demand. The pandemic has crushed global demand, and even a cut of 10 million barrels per day or more would leave millions of barrels stranded, pressuring prices further.
"The collapse in oil prices is a result of the reality that while OPEC is cutting as expected, there is simply too much crude in the physical space for sale, with too few pipelines to move it and too few buyers to take it," said Scott Shelton, energy specialist at United ICAP.
The Organization of Petroleum Exporting Countries and its allies including Russia, a group known as OPEC+, had considered curbs as great as 15 million to 20 million barrels per day (bpd), or 15% to 20% of global supplies.
However, Iran's oil minister said a production cut of 10 million bpd is just for May and June 2020. From July until the end of 2020 those cuts would fall to 8 million bpd, and then next year to 6 million bpd.
"A lot of hope got priced into this market over the past several days," said John Kilduff, partner at hedge fund Again Capital LLC.
Brent futures fell $1.36, or 4.1%, to settle at $31.48 a barrel, while U.S. West Texas Intermediate (WTI) crude dropped $2.33, or 9.3%, to settle at $22.76. That was the lowest settlement price for both contracts in a week.
A cut of 10 million bpd would be the biggest output cut ever agreed by OPEC, but Russia has insisted it will only reduce output if the United States joins the deal.
"A 10 million bpd deal is far lower than what the market needs at the moment," said Bjornar Tonhaugen, head of oil markets at Rystad Energy noting "now hopes can only rely on what other countries outside the alliance will do."
Canada and Brazil are cutting output now due to market forces, but Jason Kenney, premier of Alberta, Canada's largest producing province, said it has already done its part.
The United States has not said it will mandate output reductions. Instead, it has noted that market forces are already causing producers to pull back, as it expects its output to fall by nearly 2 million bpd by next year.
U.S. oil rigs in operation fell by 58 this week to 504, the lowest level since December 2016.
Energy ministers from the Group of 20 (G20) major economies are set to meet on Friday.
The last OPEC meeting in early March ended acrimoniously, with Russia and Saudi Arabia unable to come to an agreement to curb output as the virus spread, adding to the slump in prices.
Meanwhile, the U.S. contract expiring in June rose to its highest premium over the front-month since 2009, a signal that traders are worried that the U.S. would run out of most onshore storage in a matter of weeks, traders said. (Additional reporting by Laila Kearney, Laura Sanicola Devika Krishna Kumar and Jessica Resnick-Ault in New York, Liz Hampton in Denver, Shadia Nasralla in London, Sonali Paul in Melbourne and Seng Li Peng in Singapore; Editing by Marguerita Choy, Raissa Kasolowsky and David Gregorio)
Reuters News & Media Inc.
Divergence in Oil Prices Shows Collapse in Demand; Physical barrels of crude cost significantly less than futures, a sign that supply is swamping demand
The Wall Street Journal Online
8 April 2020 15:50
Copyright 2020 Dow Jones & Company, Inc. All Rights Reserved.
Oil futures have rallied over the past week, lifted by hopes that the U.S. will join other producers in cutting production. But the price of actual barrels of oil has lagged behind, showing that supply is swamping demand as the coronavirus pandemic sparks a downturn in the global economy.
The price of Dated Brent, a key gauge of the market for oil cargoes in the North Sea, has been at least $5 a barrel lower than the price of Brent-crude futures since March 24. This gap expanded to $10.82 a barrel, its widest level for at least a decade, late last week.
Physical and futures prices remained more than $10 apart on Wednesday, when Dated Brent cost $22.32 a barrel and Brent-crude futures rose 3% to $32.84 a barrel.
Typically, Dated Brent and Brent-crude futures trade within a few dollars of each other. The divergence is a sign of strains in the physical oil market as traders scramble to find buyers or places to store crude.
"It shows there are no buyers," said Chris Midgley, head of analytics at S&P Global Platts. Platts has assessed the price of Dated Brent, which is widely used in contracts in the oil industry, daily since the 1980s.
The gloom in physical oil markets stands in contrast to the futures market, which investors use to bet on the direction of prices. Crude futures have rallied ahead of a virtual meeting of the Organization of the Petroleum Exporting Countries and its allies, led by Russia, on Thursday. U.S. Energy Secretary Dan Brouillette will talk with energy ministers from the Group of 20 nations on Friday.
Saudi Arabia and Russia have said privately they are open to reducing production only if the U.S. also agrees to mandate cutbacks. The White House plans to use forecasts that U.S. oil production is set to decline to show that American oil producers are lowering output.
Investors are hopeful that major producers will agree to lower output to ease pressure on the energy industry and on national budgets. Current output levels are expected to fill available storage capacity on land close to the brim within weeks as lockdowns wipe millions of barrels off the amount of oil the world consumes each day.
A deal to limit oil production would avert a "disorderly survival of the fittest" in which low prices force higher-cost producers out of business, said Jeff Wyll, an analyst at asset manager Neuberger Bermann. Still, Mr. Wyll expects there to be "more volatility, more downside" in oil prices over the coming weeks regardless of whether producers reach an agreement.
The gap between prices of oil barrels and oil futures "looks extremely wide," said Martijn Rats, an oil analyst at Morgan Stanley. It reflects that "the real crunch point for the oil market from a demand perspective is likely to be April," Mr. Rats added, before consumption starts to pick up in May and June.
The divergence between physical and futures prices creates an opportunity for some traders to make easy money, Mr. Rats said.
Traders are able to buy barrels of oil on the cheap and lock in a higher price for selling them in the futures market. Provided that the gap in prices is greater than the cost of storing the oil on land or at sea, they will make a profit.
Write to Joe Wallace at Joe.Wallace@wsj.com
Dow Jones & Company, Inc.