Oil on Friday posted a record weekly jump on hopes that global producers will decide to make historic output cuts next week, although optimism was tempered by concern that the curbs would not avert a glut.
The OPEC+ coalition, including Saudi Arabia, is to hold a meeting of its members by video conference tomorrow, with the gathering open to even producers outside the group.
While it is unclear who would attend, market watchers are predicting that stockpiles are likely to swell even if global supplies are cut by 10 million barrels a day.
Photo: Bloomberg
Investors would be closely watching the guest list of the meeting — especially names outside OPEC and its allies — after Saudi Arabia made clear that it would only cut production if others, including the US, shoulder some of the burden.
US West Texas Intermediate futures ended the week up 32 percent at US$28.34 a barrel, while Brent crude jumped 37 percent to US$34.11 a barrel. Still, prices are less than half the levels at the start of the year, with the COVID-19 pandemic crushing demand.
“I think Russia, Saudi Arabia and OPEC are coming to the conclusion that if they don’t agree to something, it will be forced on them by the market,” Tortoise Capital Advisors LLC portfolio manager Brian Kessens said. “Any cuts will extend the runway to June instead of May, which is helpful as countries try to work through the coronavirus lockdown. But it only softens the blow.”
One delegate from the producer group said that a global cut of 10 million barrels a day is a realistic goal.
Russian President Vladimir Putin told the country’s top oil executives that producing countries should join together to slash output to reverse the collapse in prices, adding that worldwide curbs of a little above or below 10 million barrels a day are possible.
Getting countries from all over the world to agree would be a tough task. Even if that is successful, an output reduction of the size that is being discussed would be just a fraction of the 35 million barrels of daily demand destruction some traders now see.
Citigroup Inc and Goldman Sachs Group Inc have argued that any supply reduction deal would anyway be too little, too late, as consumption craters due to efforts to stem the spread of the coronavirus.
“A near-term return to production cuts still seems unlikely, and we are skeptical that such a large coalition could be put together,” Morgan Stanley analysts wrote in a note.
Some of the necessary production shut-ins are likely to occur in the US due purely to market forces.
The announcement of a potential supply cut first came from US President Donald Trump, who on Thursday tweeted that he had spoken to Saudi Crown Prince Mohammed bin Salman, who had in turn spoken with Putin.
However, the US leader’s goal is purely aspirational and would ultimately hinge on whether Riyadh and Moscow can reach a deal, a person familiar with the situation said.
Apart from benchmark futures, hopes for the curbs have boosted every corner of the market over the past 24 hours, from time spreads used to gauge market health, to key North Sea swaps. Those gains are now easing, as traders worry that the undertaking might be too fraught with hurdles.
The physical oil market of actual barrels of crude continued to remain under pressure, giving producers more urgency to act.
Belarus said Russian companies are offering Urals oil for US$4 a barrel.
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