Oil prices tumbled on Thursday on doubts that a deal between OPEC and allies to make a record oil supply cut would be enough to offset the collapse in global fuel demand caused by the coronavirus pandemic.
The Organization of the Petroleum Exporting Countries and its allies including Russia, a group known as OPEC+, agreed to cut output by 10 million barrels per day from May, the group said in a statement.
Before the coronavirus outbreak hit global transportation and economic activity, 10 million bpd was about 10% of global supply.
OPEC+ expects other producers including the United States to cut another 5 million bpd. But Washington has not offered to participate, and even if it did, the combined reduction in supply would be about half the 30% worldwide fall in demand
Brent futures fell $1.36, or 4.1%, to settle at $31.48 a barrel, while U.S. West Texas Intermediate (WTI) crude dropped $2.33, or 9.3%, to settle at $22.76.
“The collapse in oil prices is a result of the reality that while OPEC is cutting as expected, there is simply too much crude in the physical space for sale, with too few pipelines to move it and too few buyers to take it,” said Scott Shelton, energy specialist at United ICAP.
OPEC+ had considered curbs as great as 15 million to 20 million barrels per day (bpd), or 15% to 20% of global supplies. The possibility of deeper cuts sent oil prices surging nearly 10% early in the day.
However, OPEC said it would ease output cuts between July and December to 8 million bpd and to 6 million barrels between January 2021 to April 2022.
“A lot of hope got priced into this market over the past several days,” said John Kilduff, partner at hedge fund Again Capital LLC.
OPEC+ said it would hold another video conference meeting on June 10, to assess the market. Energy ministers from the Group of 20 (G20) major economies are set to meet on Friday.
“We are expecting other producers outside the OPEC+ club to join the measures, which might happen tomorrow during G20,” the head of Russia’s wealth fund and one of Moscow’s top oil negotiators, Kirill Dmitriev, told Reuters.
A cut of 10 million bpd would be the biggest ever agreed by OPEC, but Russia has insisted it will only reduce output if the United States joins the deal.
Canada and Brazil are cutting output now due to market forces, but Jason Kenney, premier of Alberta, Canada’s largest producing province, said it has already done its part.
The United States has not said it will mandate output reductions. Instead, it has noted that market forces are already causing producers to pull back, as it expects its output to fall by nearly 2 million bpd by next year.
U.S. oil rigs in operation dropped by 58 this week to 504, the lowest level since December 2016.
The last OPEC meeting in early March ended acrimoniously, with Russia and Saudi Arabia unable to come to an agreement to curb output as the virus spread, adding to the slump in prices.
Meanwhile, the U.S. contract expiring in June rose to its highest premium over the front month since 2009, a signal that traders are worried that the U.S. would run out of most onshore storage in a matter of weeks, traders said.