LONDON • The world's top oil producers pulled off a historic deal to cut global petroleum output by nearly 10 per cent, putting an end to a devastating price war.
But an oil price rally that followed the move was short-lived, leaving traders doubtful whether the deal is enough to steady a market pummelled by the coronavirus pandemic and where storage space for surplus crude is rapidly running out.
Brent futures in London were down 0.4 per cent after the Opec+ alliance agreed to a plan to slash production by 9.7 million barrels per day (bpd) in May and June.
That headline cut may be more than four times deeper than the previous record set in 2008, and may provide a floor for prices according to some analysts, but the reduction was still dwarfed by the near 30 million bpd drop in demand this month already anticipated by forecasters like Goldman Sachs.
Opec+ reached the pact following days of intense negotiations after Mexico declined to endorse an original agreement made last Thursday.
The United States, Brazil and Canada will contribute an additional 3.7 million bpd on paper as their production declines, and other Group of 20 nations will cut 1.3 million bpd more.
The G-20 numbers do not represent real voluntary cuts but rather the impact that low prices have already had on output, and they would need months, or perhaps more than a year, to take effect.
Brent for June delivery was 18 US cents lower at US$31.30 a barrel on the ICE Futures Europe exchange as of 11.55am in Dubai. The contract jumped as much as 8 per cent, or US$2.51, earlier in the day. It lost 7.7 per cent last week and has fallen from US$66 at the end of last year.
West Texas Intermediate for May delivery was trading 0.7 per cent higher at US$22.91 a barrel on the New York Mercantile Exchange, after dropping almost 20 per cent last week.
This means oil prices are still 50 per cent to 60 per cent down for the year. Crude has been in free fall since the middle of February as some of the world's biggest economies went into lockdown to curb the spread of the coronavirus.
Goldman Sachs called the agreement "historic yet insufficient". The voluntary reductions by Opec+ would only lead to an actual 4.3 million bpd cut in production from first-quarter levels, assuming full compliance by core-Opec and 50 per cent by other participants next month, Goldman said in a note. The bank sees demand losses this month and the next, averaging 19 million bpd.
"Even if these cuts provide a floor to prices, they will not be able to boost prices given the scale of inventory builds we are still staring at," Energy Aspects analyst Virendra Chauhan said, referring to storage tanks and ships around the world that are filling up fast as oil demand crumbles.
"The absence of hard commitments from the United States or other G-20 members is (a) shortcoming of the deal."
Mexico will reduce output by just 100,000 bpd, after rejecting its 400,000 bpd share of the original deal. US 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 exception granted to Mexico may drive cracks through Opec+ and the lack of a formal contribution from non-Opec nations such as Canada, Norway and Brazil is also disappointing, said Ms Vandana Hari, founder of Vanda Insights in Singapore.
There will be a lot of scrutiny on compliance and also scepticism that the targeted reduction can be met, she said.
The Opec+ alliance initially met last 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.
Saudi Aramco once again delayed a key pricing decision in anticipation of final approval of the deal, with its official selling prices expected yesterday.
"This isn't going to address the oversupply," said Ms Amrita Sen, chief oil analyst at consultancy Energy Aspects.
"Yes it's a historic deal, but these kinds of cuts will need to be in place for months, if not a year, to come anywhere close to solving the problem."