After what amounted to four days of online and behind-the-scenes horse trading, the deal announced on April 12 to cut a bit less than 10 million barrels per day (b/d) of oil supply – and possibly more – was greeted by markets overnight and into Monday by what amounted to a gigantic shrug.
At approximately 8:30 a.m., WTI crude was up just 13 cents/barrel to $22.89, a gain of 0.57% from the settlement of Thursday, April 9 (markets were closed on April 10 for the Good Friday observance). Brent, the world crude benchmark, was down 21 cents/barrel to $31.27, a gain of 0.67%. Ultra low sulfur diesel (ULSD) was up 0.2 cents at 97.46 cents/gallon.
Oil prices had started to move higher earlier this month when reports broke in early April that there would be a resumption of talks among major oil exporters that could also lead to a detente in the weeks-old price war between Saudi Arabia and Russia. But that proved to be short-lived as the usual rifts in the OPEC+ group emerged between Saudi Arabia and Russia and then Mexico.
From a bottom of $20.28 on March 30, WTI rose to $28.34/barrel before settling back on April 9 at $22.76/barrel. For ULSD, the April 1 bottom of 93.23 cents/g had risen only to 97.26 cents/g at April 9’s settlement.
The core of the deal agreed to on April 12 calls for agreed-upon cuts of 9.7 million b/d. Originally, the target was a 10-million b/d reduction but Mexico – protected to some degree by its enormous annual hedging program – only agreed to a 100,000 b/d cut.
But that is the base number. Reports about the meeting from various regular OPEC reporters spoke of other reductions that might be on the way from what was an oil supply of about 100 million b/d before the COVID-19 crisis. Most of those reductions were likely to have taken place anyway, because low prices would have resulted in shutdowns (always problematic because of damage to reservoirs) or at least cutbacks. One estimate is that reductions out of the U.S., Brazil and Canada will be 3.7 million b/d while other G-20 nations, like Norway, will see reductions in output that could total 1.3 million b/d.
Even if all the cuts are implemented (which is highly unlikely), counting them is always a challenge. Goldman Sachs, for example, published a report estimating the actual real cuts from the deal would be more like 4.3 million b/d. When that number is laid up against an estimated downturn in demand that is as little as 20 million b/d or as high as 30 million b/d or more, the fact that this is the most sweeping agreement ever made by countries to rein in production doesn’t look that impressive.
Still, the deal runs into 2022 so the producers look to be playing a long game.
The long game is going to be what’s needed in the oil patch, according to the recent quarterly survey from the Kansas City Federal Reserve. In its extremely pessimistic outlook for the state of the U.S. oil patch, it highlighted several quotes from oil patch operators on their future. Among them:
– “We cannot continue producing oil below the cost to produce it. Prices must go up, but there is a world-wide oversupply keeping prices down.”
– “Long-term $30 per barrel (oil price) will lead to massive consolidation and insolvency. I’m estimating that some will be able to hang on for another year, but two years probably reduces E&Ps significantly.”
– “I don’t know of any companies that can operate profitably at that price ($40/b oil). The ones that stay solvent have cash reserves, refining or other revenue streams to keep them solvent.”
– “Long term, $40 is not enough. Some will be able to survive but many/ most will not.”
The role of President Trump in the negotiations was seen as significant. The fact that the U.S. was seeking to work with OPEC to boost prices marked a total reversal of all U.S. policy in the past except for a brief period in the late 1980s under the Reagan administration, after the 1985-1986 collapse in prices.