Oil prices jumped more than $1 a barrel on Monday after major producers finally agreed their biggest-ever output cut, but gains were capped amid concern that it will not be enough to head off oversupply with the coronavirus pandemic hammering demand.
After four days of wrangling, the Organization of the Petroleum Exporting Countries (OPEC), Russia and other producers, a group known as OPEC+, agreed on Sunday to cut output by 9.7 million barrels per day (bpd) to support oil prices, sources said, representing about 10 percent of global supply.
Total global oil supply cuts could come to 20 million barrels per day, approximately 20 percent of global supply, Kuwait’s oil minister said.
Brent crude futures rose $1.23, or 3.9 percent, to $32.71 a barrel by 00:58 GMT after opening at a session high of $33.99. United States West Texas Intermediate (WTI) crude futures were up $1.39, or 6.1 percent, to $24.15 a barrel, after hitting a high of $24.74.
Still, demand concerns capped oil price gains. Worldwide fuel consumption is down roughly 30 percent, due to the COVID-19 pandemic that has killed more than 100,000 people globally and kept businesses and governments on lockdown.
“These levels of production cuts are not material to oil prices in the near term, given the deep hole in demand we are likely to see in 2Q20 (the second quarter of 2020),” Suvro Sarkar, regional energy analyst at DBS Bank told Al Jazeera.
“However, the cuts do signal to the market that producers are willing to control supply going forward, unlike the situation of price wars that Saudi and Russia were hitherto engaged in,” he said.
Leaders of the world’s top three oil producers – Russian President Vladimir Putin, US President Donald Trump and Saudi Arabia’s King Salman – all supported the OPEC+ deal to cut global crude output, the Kremlin said on Sunday.
Trump praised the deal, saying it would save jobs in the US energy industry.
Saudi Arabia, Kuwait and the United Arab Emirates volunteered to make cuts even deeper than those agreed, which would effectively bring the OPEC+ supply down by 12.5 million bpd from current supply levels, the Saudi energy minister said.
The deal had been delayed since Thursday after Mexico baulked at the production cuts it was asked to make. The OPEC+ group met on Sunday to hammer out the agreement, resulting in an output cut four times deeper than the previous record reduction in 2008.
OPEC+ has also said it wanted producers outside the group, such as the US, Canada, Brazil and Norway, to cut a further 5 percent or 5 million bpd.
Canada and Norway signalled a willingness to cut. The US, where antitrust legislation makes it hard to act in tandem with cartels such as OPEC, has said its output would already fall by as much as 2 million bpd this year without planned cuts because of low prices.
“While the OPEC+ cuts does not seem to be conditional on US cuts, there is a risk that the members could have a rethink if they don’t see US production falling over a period of time,” Sarkar said.
Goldman Sachs said on Sunday that oil prices would continue to fall in the coming weeks, reasoning that a “historic yet insufficient” deal by major oil producers to cut output is unlikely to offset a coronavirus-led demand rout.
Even with core-OPEC members fully complying with the cuts, and 50 percent compliance by all other countries that have agreed to curb production in May, the voluntary cuts would translate into a reduction of only 4.3 million bpd from first-quarter levels, the bank said.
The bank saw downside risks to its short-term oil price forecast of about $20 per barrel for Brent, but projected the global crude benchmark would outperform US oil because OPEC+ producers’ exports would likely fall, freeing up floating storage space.
A bigger output cut by G20 nations would also not help much, it said.
“Ultimately, this simply reflects that no voluntary cuts could be large enough to offset the 19 million bpd average April-May demand loss due to the coronavirus.”