Floundering Oil Prices Endanger World Supply Once Again

Markets are delivering a stinging assessment of OPEC+'s historic 9.7MMb/d output reduction agreement, which despite slashing 10 percent from global production, has done little to change the downward spiral of the world's oil prices.

As an unprecedented demand collapse continues to unfold, Wednesday morning saw WTI fall to US$19.20 per barrel while Brent’s price was trimmed by 5 percent to $28. The Mexican crude oil basket price closed Tuesday at Us$15.30, having lost 10.84 percent of its value during trading. How low oil prices will fall is now anyone’s guess.

The situation for global oil is now extremely worrying. The slashing of 9.7MMb/d from the world’s oil output, the largest group effort in history, has not been able to swim against the tsunami of negative economic news that the COVID-19 pandemic keeps generating. On Monday, IMF reported the likelihood of an economic recession that will be more devastating than anything seen since the Great Depression, over 90 years ago.

Ongoing shutdowns of major world industries have seen oil demand evaporate. The International Energy Agency monthly report stated that April’s demand will be 29MMb/d lower than 2019’s average, hitting its lowest point since 1995 and “erasing almost a decade of growth.”

At the release of the IEA’s monthly report, Director Fatih Birol told reporters that: “In a few years’ time, when we look back at 2020, we may well see that it was the worst year in the history of global oil markets.”

Prior to the OPEC+ cut, experts were warning that the world may soon reach its storage maximum. The market’s unenthusiastic response and oil’s ongoing demand drop, despite the periodic reopening of some national economies, mean that these warnings remain.

Despite more nations being out of lockdown and industries beginning to reignite, June’s demand will still be 15MMb/d less than a year ago, says the IEA. China, India, Korea and the US have offered their strategic storage space to the private industry, which will “create extra headroom for the impending stock build-up, helping the market get past the hump.” With a sharp output reduction and a return to more normal economic behaviors in 2Q20, demand for oil should exceed supply.

But short-term urgency remains. IEA reports that even with these impending measures, “the implied stock build-up of 12Mb/d in the first half of the year still threatens to overwhelm the logistics of the oil industry – ships, pipelines and storage tanks – in the coming weeks”.

In other news, Mexico’s Energy Minister Rocío Nahle said that Mexico’s 100Mb/d production cut – just a quarter of the OPEC+ nations’ request – will last only two months, May and June. In comparison, all other OPEC+ nations agreed to reduced production measures that will last until April 30, 2022.

Mexico’s agreed reduction accounts for only 6 percent of its overall output, a far cry from the 23 percent cut that OPEC members and allies are making.

Mexico President Andrés Manuel López Obrador also told the press that there was no “secret deal” struck between Mexico and the US that helped the OPEC+ agreement get over the line. Though President López Obrador did confirm he had requested the help of the US president in getting ventilators, President Trump did not give a response at that time.