Regardless of OPEC Curtailment, Oil Market Imbalance Said a ‘Demand-Driven Issue’

This article was written by Natural Gas Intelligence

Market observers breathlessly awaited the outline of an agreement Thursday between the Organization of the Petroleum Exporting Countries (OPEC) and its allies to curb production and begin balancing a global market awash in crude.

Reports varied on crucial points such as the volume, duration and baseline starting point of the cuts being discussed via teleconference by delegates from the so-called OPEC-plus alliance and other invited producer countries.

What appeared clear, however, was a desire by the parties to reach some sort of deal amid an unprecedented demand collapse and build-up of crude stocks from the Covid-19 pandemic.

By most published accounts, Saudi-led OPEC and its allies were nearing an agreement to temporarily slash production by at least 10 million b/d, thereby ending the price war between Saudi Arabia and non-OPEC heavyweight Russia that has exacerbated the global supply glut since March 6, when the two countries last attempted, and failed, to agree on curtailing output.

A 10 million b/d cut, if true, “is a good first step, but it would still not be enough” to balance the market given the global oversupply of more than 20 million b/d expected for 2Q2020, Rystad Energy analysts said Thursday, adding that “the 10 million b/d figure alone would not make a material difference or reverse the deep contango curve of Brent prices in a meaningful or lasting way” if OPEC-plus cannot convince other major producers to commit to voluntary supply cuts.

Nonetheless, it could save global upstream operators “from a large number of forced production shut-ins over the next couple of months, buying the currently broken oil market precious needed time to adjust to ‘the new normal,’” the Rystad team said.

STARTING POINT?

The impact of supply cuts on pricing also depends greatly on the baseline production level used as a starting point, Tudor, Pickering, Holt & Co. (TPH) analysts said Thursday, since OPEC-plus has recently threatened to add up to around 4 million b/d of supply from February levels.

The Saudis already have ramped up production by about 2.3 million b/d since February to more than 12 million b/d currently, and the United Arab Emirates “has also increased output notably,” the TPH team said.

Therefore, if April is the starting point, about 4 million b/d would have to be subtracted from the headline supply cut to gauge the true impact of curtailment, analysts said.

“Overall, we need to see a true 10-15 million b/d cut for at least three-to-four months for the market to respond positively for a longer period of time” versus a short-term spike, the TPH team said, adding, “until then this continues to be a demand-driven issue with inventories continuing to build meaningfully in the coming months.”

No agreement, preliminary or otherwise, had been announced by OPEC as of Thursday afternoon.

Even less clear was the role that countries from outside the OPEC-plus alliance, such as the United States and Canada, would play in balancing the market, apart from involuntary supply cuts due to the collapse in prices and demand.

In a Thursday note, analysts at ESAI Energy said they expect non-OPEC countries, excluding Russia, to slash production by about 3.1 million b/d by December, with Lower 48 onshore accounting for about 1.3 million b/d of the total.

Rystad, meanwhile, is forecasting more than 1.1 million b/d of shut-in Canadian production in the second quarter.

After reaching an intraday high of $28.36/bbl, the May West Texas Intermediate futures contract settled at $22.76 Thursday, off 9.3% from Wednesday.

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