Crude oil posts strong gains; OPEC+ set to meet to discuss cuts
LONDON, April 3, 2020 – Oil markets pushed higher Friday, continuing Thursday’s hefty gains, amid hopes that the major oil producers will agree a hefty supply cut to try and balance a market flooded with crude.
AT 7:55 AM ET (1155 GMT), US crude futures traded 5% higher at $26.59 a barrel, while the international benchmark Brent contract rose 9% to $32.63. Both contracts gained over 20% Thursday.
Despite these gains, global prices have still fallen by roughly a half this year as the coronavirus has slammed global economies at the same time major producers Saudi Arabia and Russia have started to pump extra oil into the market.
The catalyst for Friday’s gains was the confirmation that OPEC+, an alliance of major oil producers including Saudi Arabia and Russia, will meet virtually on Monday to discuss supply cuts.
This backs up, to a certain extent, President Donald Trump’s tweet Thursday that raised the possibility that those two countries, and maybe the US, would join together to cut daily supplies by 10 million to 15 million barrels.
This is all well and good in theory, but the implementation of such swingeing cuts may well prove too tricky.
“It is difficult to see the current OPEC+ group cutting output by at least 10MMbbls/d – the scale of the reduction would be just too much for the group to handle,” said ING, in a research note. “Therefore, if a deal is to materialize, and one of this size, it would require the involvement of further producers. This would include countries like Canada, Brazil and in particular the US”
“The US needs to contribute from shale oil,” one OPEC source told Reuters. Russia in particular has long expressed frustration that its joint cuts with OPEC were only lending support to higher-cost US shale producers.
“This is where it becomes more difficult, as getting the U.S. oil industry to agree on production quotas will be a tough ask, and is also unlikely to gel with US antitrust legislation,“ ING added.
President Trump will meet US oil executives later Friday, where not only domestic production cuts but tariffs on foreign oil imports are likely to be discussed.
Still, even if a cut of 10 million barrels a day is agreed upon, it’s not clear that that will be enough to stabilize a market that is suffering from extreme demand destruction on the back of the policies used to combat the spread of the coronavirus. Some traders estimate the lost demand could be as high as 35 million barrels a day.