Crude Reality Of Dire Demand Sends Oil 9% Lower Despite Historic OPEC+ Deal

An oil production cut of historic proportions was sealed on Easter Sunday (April 12) to help a beleaguered oil and gas industry from hemorrhaging into the ground. It will take 9.7 million barrels per day (bpd) out of the global supply pool to help cope with the economic slump triggered by the coronavirus or Covid-19 global pandemic. Alas, the move hasn’t quite calmed the market.

But before delving into the reason, here goes the backstory in case you haven’t heard – both Russia and Saudi Arabia committed, at least on paper, to reduce 2.5 million bpd from a rehashed headline level of 11 million bpd. Others – both within and and beyond the OPEC+ producers’ group that collapsed so spectacularly on March 6 – pitched in, nudged on by the feverish diplomacy drive undertaken by U.S. President Donald Trump.

G20 Energy Ministers committed to another couple of million bpd atop OPEC+’s 9.7 million bpd. Yet for all of that, on Tuesday (April 14), the first full volume oil trading session following the Easter break, the West Texas Intermediate (WTI) May futures contract and the June Brent contract have taken an absolute hammering.

At the time of writing (14:33pm EDT), WTI May futures were down 9.42% or $2.11 to $20.30 per barrel, while Brent June futures were down 6.71% or $2.13 to $29.61 per barrel; both being the first two months that the production cuts would make their presence felt, having arrived a tad too late for April.

It’s not that the crude market did not get the memo of about the historic deal; rather it read the fine print of the deal only too well. Even if taken at its face value of 9.7 million bpd, plus say another 1.5 million bpd in cuts with effect from May, the total is just not adequate.

Dire second quarter demand decline forecasts range from ‘optimistic’ ones in the region of 18.5 million bpd to pessimistic ones running as deep as 30-35 million bpd. That means at the extreme end of the range, the cut would only amount to a third of loss in demand, and would fall way short of even the most optimistic demand decline forecast.

As I opined on the BBC, the agreement cannot prevent a dire summer for oil producers of all stripes. Question is where from here and the International Monetary Fund’s take on the global economy does not fill anyone with confidence.

It estimated on Tuesday that the global economy will shrink 3% this year, reversing its pre-Covid-19 pandemic forecast of 3.3% growth. To quote IMF Chief Economist Gita Gopinath: “This crisis is like no other. Like in a war or a political crisis, there is continued severe uncertainty about the duration and intensity of the shock.”

Of course, Gopinath like many other commentators cautiously suggests an economic recovery could take hold by the first quarter of 2021, helping, among other commodities, and uptick in oil demand and of course prices.

But near-term demand will remain dire, and in my opinion a move to $40 per barrel, level using Brent as a benchmark, may not arrive before the end of third quarter. That’s after the sector has felt more industry pain, more bankruptcies, more production cuts and more bailouts, as whole economies from India to France spend much of the summer in whole or partial lockdowns.