Oil continues climb on hopes for global agreement on output cut

By Catherine Ngai and Alex Longley on 4/3/2020

NEW YORK (Bloomberg) --Oil extended its biggest-ever surge in New York, though the advance was tempered by skepticism over whether a producer meeting Monday would deliver output cuts large enough to avert a glut.

The OPEC+ coalition including Saudi Arabia will hold a meeting of its members by video conference on Monday, with the gathering open to even producers outside the group. While it’s unclear who will attend, market watchers are predicting that stockpiles are likely to swell even with a cut of 10 million barrels a day in global supplies.

Investors will be closing watching the guest list of the meeting -- especially names outside the Organization of Petroleum Exporting Countries and its allies -- after Saudi Arabia made clear it will only cut production if others, including the U.S., shoulder some of the burden.

U.S. West Texas Intermediate futures rose as much as 13% Friday, before paring gains to about 5%. They had soared a record 24% in the previous session. Still, prices are less than half the levels at the start of the year, with the coronavirus crisis crushing demand.

 “I think Russia, Saudi Arabia and OPEC are coming to the conclusion that if they don’t agree to something, it will be forced on them by the market,” said Brian Kessens, a portfolio manager at Tortoise Capital Advisors. “Any cuts will extend the run way to June instead of May, which is helpful as countries try to work through the coronavirus lockdown. But it only softens the blow.”

One delegate from the producer group said a global cut of 10 million barrels a day is a realistic goal. Russian President Vladimir Putin told the country’s top oil executives that producing countries should join together to slash output to reverse the collapse in prices, adding that worldwide curbs of a little above or below 10 million barrels a day are possible.

Prices:

  • West Texas Intermediate for May delivery rose $1.27 to $26.59 a barrel as of 11:52 a.m. in New York, on track for its best week since January 2009
  • Global benchmark Brent crude for June delivery rose $2.74, or 9.15%, to $32.68 a barrel
  • Brent’s premium to WTI rose by $1.25 to $3.14 for the same month

Getting countries from all over the world to agree would be a tough ask. Even if that’s successful, an output reduction of the size that’s being discussed will be just a fraction of the 35 million barrels of daily demand destruction some traders now see.

Citigroup Inc. and Goldman Sachs Group Inc. have argued any supply-reduction deal would anyway be too little, too late as consumption craters due to efforts to stem the spread of the coronavirus.

“A near-term return to production cuts still seems unlikely, and we are skeptical that such a large coalition could be put together,” Morgan Stanley analysts wrote in a note. Some of the necessary production shut-ins are likely to occur in the U.S. due purely to market forces.

The announcement of a potential supply cut first came from U.S. President Donald Trump, who tweeted on Thursday that he had spoken to Saudi Crown Prince Mohammed bin Salman, who had in turn spoken with Russia’s Putin.

However, the U.S. leader’s goal is purely aspirational and will ultimately hinge on whether Riyadh and Moscow can reach a deal, a person familiar with the situation said.

Apart from benchmark futures, hopes for the curbs have boosted every corner of the market over the last 24 hours, from timespreads used to gauge market health, to key North Sea swaps. Those gains are now easing as traders worry that the undertaking may be too fraught with hurdles.

The physical oil market of actual barrels of crude continued to remain under pressure, giving producers more urgency to act. Belarus said Russian companies are offering Urals oil for $4 a barrel.

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