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Oil futures lost ground Tuesday, weighed down by a global glut of crude as demand slumps due to the disruptions to travel and trade resulting from the COVID-19 pandemic and a month-long price war between Saudi Arabia and Russia that was ended over the weekend with an agreement by major producers to cut output.
Traders remain skeptical that the output cut deal avert significant oversupply in the months ahead as evidenced by a steep contango for Brent and WTI forward prices.
“While the cut is well beyond previous record agreements, the math remains firmly in favor of the bears,” said Robbie Fraser, senior commodity analyst ay Schneider Electric.
“The deal to remove roughly 10% of global supply comes as global demand is suffering 20-30% losses, virtually guaranteeing a flood of crude and products heading into storage in the short and medium-term,” he said in a market update.
West Texas Intermediate crude for May delivery CL.1, -6.78% fell $1.34, or 6%, to $21.07 a barrel on the New York Mercantile Exchange, with prices on pace to settle at their lowest since April 1. June Brent crude BRNM20, -5.35% was off $1.50, or 4.9%, at $30.19 a barrel on ICE Europe.
Oil saw a mixed finish on Monday, with U.S. benchmark prices down, but global benchmark prices posting a gain.
While the output cuts agreed to by major producers on Sunday are “substantial, they still fall short of bringing the market to balance over 2Q20,” said Warren Patterson, head of commodities strategy at ING, in a note.
After several days of intense negotiations, members of the Organization of the Petroleum Exporting Countries and allies, collectively known as OPEC+, agreed Sunday to cut overall crude-oil production by 9.7 million barrels a day starting on May 1 through June 30 of this year.
The total cuts would decline to around 8 million barrels a day from July 1 through Dec. 31, followed by a smaller 6 million barrels in cuts from Jan. 1, 2021 to April 30, 2022.
The global economic outlook is still bearish for oil also, with the International Monetary Fund on Tuesday forecasting a contraction in the global economy at a 3% annual rate this year, followed by a 5.8% rebound in 2021. That’s a deeper recession than during the 2008-2009 financial crisis. The IMF said the U.S. economy would shrink 5.9% this year.
The Railroad Commission of Texas was holding a hearing on Tuesday to discuss a potential 20% reduction in oil output for the state, which would equate to roughly 1 million barrels a day out of total production of around 5 million barrels a day in Texas. The state accounts for about 40% of total U.S. output.
Scott Sheffield, chief executive officer of Pioneer Natural Resources PXD, -1.47%, said during the hearing that break even costs for most independent oil producers, including finding cost, is about $25 to $26 a barrel so the industry needs $30 to survive. At that price, “we’re crippled,” but at least the industry will survive, he said. Sheffield told CNBC earlier this month that the Texas RRC was expected to make its decision on April 21.
In a news release, trade group the American Petroleum Institute urged the Texas RRC to avoid intervening in the oil markets, pointing out that “producers in Texas and across the country have already reduced production to align with market conditions and a historic drop in demand without a government mandate.”
Read:Texas regulator to decide on crude output cuts
On Nymex Tuesday, prices for petroleum prices were mixed, with May gasoline RBK20, +4.89% up 3.2% at 72.61 cents a gallon, but May heating oil HOK20, -4.53% was down 4.8% to 94.66 cents a gallon.
May natural gas NGK20, -2.37% traded at $1.689 per million British thermal units, down 2%.
The American Petroleum Institute will issue its weekly report on U.S. petroleum supplies late Tuesday, with official U.S. government figures from the Energy Information Administration due out early Wednesday.
The EIA is expected to report a climb of 10.1 million barrels in crude stockpiles for the week ended April 10, on average, according to a poll of analysts conducted by S&P Global Platts. The poll also showed expectations for supply increases of 7.1 million barrels for gasoline and 1.8 million barrels for distillates.
