OPEC’s deal to cut oil supply not enough as oil prices close in negative territory

Author: Nikki-Lee Birdsey

Estimated read time: 3 minutes

Publication date: 21st Apr 2020 13:46 GMT+1


Oil prices have fallen by more than 63% in 2020, as the oil and energy sector has been subjected to unprecedented pressure caused by the Covid-19 crisis. The Covid-19 pandemic has killed over 164,000 people worldwide, and caused a steep decline in oil demand.

In early March this year, Russia and Saudi Arabia ended a three-year alliance that propped up prices, which resulted in a free fall that saw oil prices decline as much as 40%, finally hitting an 18-year low on March 30.  As a result, oil prices and energy sector companies have been thrown into turmoil.

On Monday, oil prices entered unchartered territory by plunging below zero at closing. The May contract for U.S. West Texas Intermediate crude oil (CL=F), which expires on Tuesday, plunged below zero for the first time in history, finally settling at -$37.63 per barrel. The June contract for the commodity also sank, but held above $20 per barrel.

Brent crude oil also fell 5.27% to $26.60 per barrel. This activity pushed down blue chips and tech shares, as well as continued the decline of commodities.

Fears peaked after the price war last week stoked fears of an oversupplied market, and news spread of storage facilities in the U.S. full to brim with crude, driving U.S. prices of crude negative.

 

The OPEC Deal

There have been a slew of reports on falling oil demand and weak fuel consumption for months. On April 12, the twenty-three oil-producing countries in the Organization of the Petroleum Exporting Companies, known as OPEC+, reached a deal that ended the price war with an agreement to cut production by 9.7 million barrels per day starting on May 1, 2020, for two months. This is the largest output cut in history. The deal details that this amount will decrease to 7.7 million barrels per day for the rest of the year, and then further down to 5.8 million barrels per day for 16 months after that.

Saudi Arabian officials reported that the total global supply cuts from oil producers could reach as many as 20 million barrels per day, including voluntary cuts from the United States and Canada. The deal was initially delayed by hesitation from Mexico, who balked at the production cut, but eventually agreed due to reassurances from United States President Donald Trump.

 

Ripple Effects

Last week energy stocks such as Marathon Petroleum (NYSE: MPC), Devon Energy (NYSE: DVN), and Phillips 66 (NYSE: PSX) jumped 3% on the news. But the production cut may not be enough to stop the coming oil and gas sector bankruptcies expected this year. According to reports, North American exploration and production companies have cut their budgets by 36% on a year-over-year basis, while international companies have cut budgets by 23%.

Key industry players including Chevron Corp (NYSE: CVX) and BP PLC (NYSE: BP) have also announced supply reductions to help stem the supply glut. But global economic activity continues to slow along with fuel demand, suggesting prices will continue their unprecedented volatility, and in turn, stoke investor fears and drag down market performance.


Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.com. The observations he makes are his own and are not intended as investment or trading advice.