Oil prices jumped on Monday after swinging wildly in early trading as investors weighed whether a historic deal by the world’s biggest producers to cut output would be enough to steady a market pummeled by the coronavirus.
Futures in London rose as much as 8% but quickly erased much of those gains as markets opened following a three-day break. 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 producer 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 another 3.7 million barrels on paper as their production declines, and other Group of 20 nations will cut an additional 1.3 million. The G-20 numbers don’t represent real voluntary cuts, but rather reflect the impact that low prices have already had on output and would take months, or perhaps more than a year, to occur.
US benchmark West Texas Intermediate (WTI) was up 7.7 per cent at US$24.52 a barrel in Asian trade while Brent crude, the international benchmark, put on 5.0 per cent to US$33.08 a barrel. Brent lost 7.7 per cent last week and has fallen from US$66 at the end of last year, while WTI dropped 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. The Opec+ deal may not 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.
“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 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.”
Goldman Sachs Group called the deal “historic yet insufficient”. The voluntary reductions by Opec+ would only lead to an actual 4.3 million barrel a day cut in production from level in the first quarter, assuming full compliance by core-Opec and 50 per cent by other participants in May, the bank said in a note. Goldman sees demand loss in April and May at an average 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.
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.