Traders fret OPEC cut can’t offset demand dip

By Lucas Ajanaku

Traders at the weekend feared the agreed cut of 10 per cent in global output by the members of the Organisation of Petroleum Exporting Countries (OPEC) and OPEC+ will not offset huge drop in demand as a result of the coronavirus pandemic.

Oil prices dropped with the price of Brent crude falling nearly 2.5per cent to $32 per barrel on Friday, despite news that the oil cartel and allies – known as OPEC+ – had reached a deal that would end a price war between Saudi Arabia and Russia that threatened to flood the market with more oil than the world could use.

Mexico initially cast some doubt over OPEC’s plans, after apparently refusing to sign up to its share of cuts, which would have been 400,000 barrels per day (bpd). The country instead offered to cut 100,000 bpd.

However, the Central American country signaled at the weekend that the United States (US) may be willing to make further cuts to its production in order to allow Mexico to make less stringent reductions. Mexican president Andrés Manuel LópezObrador said that US President Donald Trump had agreed to help out by cutting additional US output.

The cuts by the oil producer group are expected to reduce global supplies by 10 per cent or 10 million bpd, in an effort to raise prices which hit an 18-year low of $22 per barrel last month. It will also push other oil-producing states, including the US, to cut a further 5million bdp to help navigate the deepest oil crisis in decades.

Global oil fuel demand has plunged by as much as 30per cent or 30m bdp during the coronavirus outbreak, as steps to fight the disease have grounded planes, cut vehicle usage and curbed economic activity.

Even if OPEC+ succeeded in reducing output by 15million bpd, it may not be enough to prop up prices while demand continues to drop during the coronavirus lockdown. Despite the oil cartel’s best efforts, global storage facilities could still quickly fill up.

Analysts from Goldman Sachs are forecasting that the coronavirus crisis will slash demand by 19m bpd in April and May. “Such cuts, if agreed upon tomorrow, would still be too little and too late to prevent a decline in prices in coming weeks as storage capacity becomes saturated.”

But Stephen Innes, chief global markets strategist at AxiCorp, an online currency trading platform, said that while the deal will only partially offset the decline in oil prices “that’s what it was supposed to do.”

“The storm clouds for oil prices will only completely dissipate when lockdowns are lifted,” he added.

Innes also said initial worries over Mexico’s initial refusal to sign the Opec+ deal were overblown. “Mexico’s secretary of energy RocíoNahle was annoyed about being held over a barrel – as Saudi Arabia was trying to strong-arm a commitment – and rightly so she was. But the amount of ink being spilled suggesting the oil deal will fall apart on 300,000 barrels, three per cent of the total cut, is flat out absurd.”