The oil market has spent the past few days sniffing around an Opec deal that promised the biggest cuts to production in history – and has decided it was undercooked. The coronavirus hit to demand is just too big. Even the almost 10 percent reduction in global supply, far more than the cartel removed from the market during the last financial crisis, is not enough to compensate for a 30 per cent collapse in consumption as economies are shut down to stop the virus’s spread.
Nor do traders accept the assurances – from Opec’s de facto leader Saudi Arabia and the president of the US, no less – that the cuts will, in fact, be twice those agreed on Sunday night. Brent, the international crude benchmark, has fallen back below $30 a barrel from a high of almost $34 after trading began this week. This is bad news for an oil industry that had hoped Opec, together with non members such as Russia (the expanded group is known as Opec+), would staunch further price falls. Those claims of much-bigger-than-published cuts surfaced on Monday, in private briefings from Abdulaziz bin Salman, the Saudi energy minister, and then through the method usually guaranteed to move the oil price in recent years – a tweet from US president Donald Trump.
“Having been involved in the negotiations, to put it mildly, the number that OPEC+ is looking to cut is 20 Million Barrels a day, not the 10 Million that is generally being reported,” Mr Trump wrote. Opec’s communique on Sunday said the cuts would be 9.7m b/d, for May and June, and then get smaller until they ended in 2022 – hence the 10m that was generally reported. But as traders and analysts studied the fine print, they have grown more bearish.
Start with the 9.7m b/d announced in the communique. This included 2.5m b/d to be cut by Russia. In past deals with Opec, Moscow has struggled to deliver cuts amounting to barely a tenth that size. Russia previously blamed its poor record of compliance on the long lead time needed to start adjusting production. Now it pledges to deliver record-breaking cuts, lasting just two months, starting in two weeks’ time. Iraq, another producer with a patchy record, is being called upon for 1m b/d of the supply reduction.
Saudi Arabia can be relied on to deliver its 2.5m b/d of pledged cuts in full. But the kingdom negotiated a baseline of 11 m b/d from which to begin its cuts. That is about 1.3m b/ d more than it was producing in the first quarter of the year.