Oil prices jump on news of OPEC+ meeting, shares rebound

After a record surge on Thursday, crude prices fall in early Asian trade then rebound on hopes of an output cut deal.

Oil pumping jacks Bloomberg
Oil prices rebounded from early losses on Friday on renewed hopes of an agreement by the world's largest oil producers, including Russia and Saudi Arabia, to cut global crude output [File: Andrey Rudakov/Bloomberg]

Kuala Lumpur, Malaysia – The week’s drama on the world’s oil markets continued into Friday with a rebound from the day’s lows following reports that the world’s top crude producers would meet to discuss cutting output to stabilise prices.

But the recovery in oil did little to lift most major share markets in Asia and Europe, which remained in the red for most of the day.

Oil price surged past $30 per barrel late on Friday in Asia, reversing earlier declines after an urgent meeting was scheduled on Monday for the so-called OPEC+ group of producers – made up of the Organization of the Petroleum Exporting Countries (OPEC) and 11 non-OPEC countries aimed at stabilising oil prices.

The meeting came after United States President Donald Trump said in a Twitter post on Thursday that he had brokered a deal between top oil exporters Saudi Arabia and Russia to cut oil output by about 10 million barrels per day or more. His tweet drove a record single-day gain in crude prices on Thursday.

Plans for the surprise meeting renewed optimism that a truce may be in the offing after an intense price war between the Saudi-led group and Russia sent crude prices tumbling last month, hurting all exporters already reeling from an imminent sharp drop in demand as the global economy is set to shrink this year.

“That’s the most important thing on the supply side, they need to reduce the supply because the demand side is falling. Otherwise, the gap between supply and demand is so big,” Ang Kok Heng, chief investment officer at Phillip Capital Management, told Al Jazeera.

“Even if China wants to buy more oil to build its reserves, they would need to store and oil storage is full,” Ang said. He sees Russia being the obstacle to a potential ceasefire as Saudi appeared ready to reduce production.

“They should come to an agreement, hopefully. Everybody is affected,” he said.

Brent crude jumped 3.41 percent to $30.96 per barrel on Friday, while US West Texas Intermediate gained 0.43 percent to $25.41 per barrel.

Stocks in the red

But the excitement in the oil markets did not spill over into stocks. Most shares in Asia fell on Friday, while European stocks also dropped in early trade.

Singapore’s Straits Times Index declined 2.07 percent, India’s Sensex index slid 1.72 percent, while Australia’s ASX 200 index was down 1.68 percent.

China’s benchmark Shanghai Composite dropped 0.89 percent, while Hong Kong’s Hang Seng Index shed 0.8 percent.

Japan’s Nikkei 225 and South Korea’s Kospi were little changed with less than 0.1 percent movements in both indices.

Shares in the UK, Germany and France lost between 0.62 percent and 1 percent.

Volatility in stock markets is expected to persist as the world struggles to control the spread of the coronavirus, which has sickened more than a million people globally. The epicentre has shifted from China, where the outbreak started, to the US, which has overtaken China in the number of reported cases.

While Trump’s claim of an oil truce and the planned producers’ meeting lifted some hopes of a recovery in prices, the euphoria has also been met with scepticism. Analysts said a deal would be hard to reach without the participation of the US shale oil producers in output cuts. Trump has made it clear he did not promise to reduce US supplies.

“As usual with Trump, we have to be careful with his flamboyant [statement],” Freddy Lim, co-founder and chief investment officer at Singapore-based investment firm StashAway, told Al Jazeera.

“We are still in the spiral for the next few weeks. China has taken about five weeks for cases to peak and in the US it will get worse in the next few weeks, which the market has expected,” Lim said, adding that investors are eager to see if new cases of infection stabilise in the US subsequently.

Despite Thursday’s rally, oil prices are about a third of their levels at the end of December.

Scepticism over Trump’s ambitions

The crash in prices stemmed from the price war which began in early March, sparked by disagreements between Saudi Arabia and Russia on production levels, and was exacerbated by dissipating demand for oil at a time when global economic growth came to a sudden halt as the coronavirus spread.

Analysts also doubt Trump’s claim that Russia and Saudi would agree to a production cut of more than 10 million barrels per day.

“It’s difficult to see the current OPEC+ group cutting output by at least 10 million barrels per day – the scale of the reduction would be just too much for the group to handle,” Warren Patterson, head of commodities strategy at ING, wrote in a note.

He said to materialise, a deal of this size would require the involvement of additional producers, including countries like Canada, Brazil, and in particular, the US.

“This is where it becomes more difficult, as getting the US oil industry to agree on production quotas will be a tough ask, and is also unlikely to gel with US antitrust legislation.”

Even if oil producers come around in an agreement, a reduction of 10 million barrels of oil equivalent per day may not be enough to solve the surplus in the market in coming months as a widening and extended lockdown globally threatens to further sap demand, Patterson said.

Meanwhile, the global fight against the coronavirus’s spread continues to take its toll on the world economy as evidenced by grim economic data.

In the US, government figures released on Thursday showed the number of Americans filing for initial unemployment benefits soared to a new record of 6.65 million in the week ending March 28, double the number in the previous week.

Policymakers from the US to Australia and Singapore have also launched trillions of dollars of stimulus spending packages in their bids to buttress their economies, which are suffering from a sudden halt in business activities.

While the true extent of the economic damage remains uncertain, as is the duration of the pandemic, the massive government efforts globally have offered some comfort to investors.

“The market is in a stalemate of bulls and bears, previously there were just bears. Don’t forget there are also a lot of policy bazookas,” StashAway’s Lim said, adding that more stimulus spending plans are being planned by some governments to counter the economic fallout.

“We are replacing the lost output, that’s why there’s a stalemate. It’s more balanced and the market is not going down further,” he said.

Source: Al Jazeera