Oil price war truce falls short A worker takes a break at an oil processing facility of Saudi Aramco, a Saudi Arabian state-owned oil and gas company. — Picture: Getty Images

The oil price in April 2020 has so far bounced back after plunging to an 18-year low in the first quarter on a perfect storm of demand destruction from the Covid-19 pandemic and oversupply caused by a price war between Saudi Arabia and Russia.

Prices retreated last Thursday once again as the oil producers proposed production cuts that will reduce output by less than expected and still leave the market vastly oversupplied.

Oil prices rose sharply on Thursday ahead of a video conference between members of OPEC+ — the Organisation of the Petroleum Exporting Countries and non-OPEC oil-producing countries — as the market anticipated an agreement after the meeting was postponed from Monday.

Saudi Arabia and Russia have been at odds over oil production levels since early March, engaging in a bitter price war that saw prices fall by more than 60 percent in the space of a few weeks.

Investors have been watching the war of words between the two countries closely, looking for clues as to what it might mean for prices in the coming months.

Demand has plunged as industrial and transport activity has ground to a halt during shut-downs to tackle the spread of Covid-19, and it would take a drastic supply cut to rebalance the market.

This article explains the OPEC+ proposal that was agreed on Thursday and what effect it is likely to have on the market.

The first quarter of the year saw the worst performance on record for the market, with oil prices dropping sharply.

The global benchmark Brent crude oil price plummeted from $68,91 per barrel at the close on January 6 to $22,74 per barrel at the end of March, the lowest level since 2002.

Prices moved back up above $30 per barrel in the first days of April, for a gain of 50 percent from the low on hopes of an OPEC+ deal to cut production.

Brent crude gained as much as 10,8 percent on Thursday morning to $36,40 per barrel in advance of the OPEC+ meeting, while the US benchmark West Texas Intermediate (WTI) climbed by 13 percent to a high of $28,36 per barrel.

But the proposal that came out of the meeting fell far short of the market’s expectations.

Saudi Arabia and Russia each agreed to cut their output by a combined 5,3 million barrels per day to 8,5 million barrels per day in May and June, and all members agreed to cut supply by 23 per cent in that period.

OPEC+ is set to seek a further cut of 5 million barrels per day from non-members in a meeting of G20 ministers on Friday.

A larger cut coming out of that meeting could provide some support to the market, turning attention to the US, which is now the world’s largest producer and has so far resisted participating in discussions about a cut.

Although a cut of 10 million barrels is a historic high, accounting for around 10 percent of global consumption, it was already priced into the market and participants were looking for a larger number.

Demand is projected to fall by closer to 35 million barrels per day in the coming weeks, as government-ordered lockdowns during the Covid-19 pandemic have ground economies to a halt around the world.

Oil prices immediately dropped back on the news, with Brent sliding towards $31 per barrel and WTI approaching $22,50 per barrel.

Analyst outlook: What happens after the OPEC+ deal?

Oil price chart analysis in April 2020 shows there are pockets of support from $20-25 per barrel.

There is some scope for a move up towards $30 per barrel on dip buying in the coming days that will likely keep the market volatile within the broader price trend.

The fundamentals point to the downside over the near term, with the production cuts agreed in the OPEC+ deal insufficient given the sharp fall in global demand as countries continue to deal with the spread of Covid-19.

And a question mark remains over the baseline that will be used for the output cuts, as producers ramped up and began flooding the market in early March when talks collapsed without a deal.

“The market really needs more,” Dan Eberhart, CEO of US oil services company Canary, told Bloomberg TV on Thursday.

The expectation was for a cut of 15-20 million barrels per day, and the shortfall in the proposal prevented prices from moving up.

Global oil storage capacity is almost full, floating storage rates have quadrupled and are likely to continue rising, Eberhart said.

“We anticipate that the demand destruction is so large that a deal will be unable to restore market balance in the coming quarter,” said TD Securities in an analyst note on Thursday morning.

“It will take time for the market to absorb the inventory overhang that should keep pressure on prices. Contangos are also extremely steep — this translates to a high carry associated with speculative length. — capital.com

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