Oil gives up gains from historic deal to slash output amid coronavirus pandemic

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OPEC and allies led by Russia agreed on Sunday to cut oil output by a record amount - representing around 10% of global supply - to support oil prices amid the coronavirus pandemic.
Measures to curb the spread of the coronavirus have destroyed demand for fuel and driven down oil prices. PHOTO: REUTERS

LONDON (BLOOMBERG, REUTERS) - Oil surrendered gains after rising in early trading on Monday (April 13) as investors weighed whether an unprecedented deal by the world's biggest producers to cut output would would be enough to steady a market pummeled by the coronavirus.

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 a day starting in May, ending a price war between Saudi Arabia and Russia. The group reached a deal following days of intense negotiations after Mexico declined to endorse the original agreement reached Thursday.

The US, Brazil and Canada will contribute an additional 3.7 million barrels on paper as their production declines, and other Group of 20 nations will cut 1.3 million more. The G-20 numbers don't 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 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.

Oil prices have been in freefall since the middle of February as some of the world's biggest economies went into lockdown to try and stop the spread of the coronavirus. Whether the Opec+ deal will be enough to steady a market where demand losses may be as much as 35 million barrels a day and storage space is rapidly running out remains to be seen. Goldman Sachs Group called the agreement "historic yet insufficient".

"The deal is a little less than the market expected given that Mexico has gotten off easy," said Andy Lipow, president of Lipow Oil Associates LLC in Houston. "The hard work lies ahead given that the market is very skeptical that Opec+ are actually going to be able to come up with their near 10 million barrels a day of production cuts."

The voluntary reductions by Opec+ would only lead to an actual 4.3 million barrel a day cut in production from first-quarter levels, assuming full compliance by core-Opec and 50 per cent by other participants in May, Goldman said in a note. The bank sees demand losses in April and May averaging 19 million barrels a day.

Mexico will reduce output by 100,000 barrels a day, after rejecting its 400,000 barrel-a-day share of the original deal. 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.

SEVERE DISTRESS

Mr Trump had threatened Opec leader Saudi Arabia with oil tariffs and other measures if it did not fix the market's oversupply problem, as low prices have put the US oil industry, the world's largest, in severe distress.

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 Vandana Hari, founder of Vanda Insights in Singapore. There will be a lot of scrutiny on compliance and also skepticism that the targeted reduction can be met, she said.

The Opec+ alliance initially met on 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 now expected on Monday.

"This isn't going to address the oversupply," said Amrita Sen, chief oil analyst at consultancy Energy Aspects Ltd. "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."

A previous agreement by Opec+ to cut production this year fell apart because of a dispute between Russia and Saudi Arabia, triggering a price war that brought a flood of supply just as demand for fuel was crushed by the coronavirus pandemic.

Global oil demand is estimated to have fallen by a third as more than three billion people are locked down in their homes due to the outbreak.

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