Oil prices steady as record cuts begin

Brent crude hit near 21-year low last month as pandemic squeezed demand


Reuters May 02, 2020
OPEC, Russia and other producers, known as OPEC+, have agreed to cut output by 9.7 million barrels per day from May 1. PHOTO: FILE

NEW YORK: Oil prices were largely steady in volatile trade on Friday as Organization of Petroleum Exporting Countries (OPEC) and its allies embark on record output cuts to tackle a supply glut due to the coronavirus crisis but gains were limited as investors awaited signs of a prolonged recovery in demand.

The global oil benchmark, Brent crude, has fallen about 60% in 2020 and hit a near-21-year low last month as the pandemic squeezed demand and OPEC and other producers pumped at will before reaching the new supply deal that kicked in on Friday.

Brent futures LCOc1 for July eased 50 cents, or 1.9%, to $25.98 by 11:56am ET (1556 GMT). The June contract expired on Thursday at $25.27.

US West Texas Intermediate crude (WTI) CLc1 was seven cents, or 0.4% lower, at $18.77 after climbing above $20 earlier in the session.

Both benchmarks rallied sharply on Thursday. Brent rose 12% and US crude gained 25%. For the week, Brent was on track for a gain of more than 20% while WTI headed for an increase of about 11%.

OPEC, Russia and other producers, known as OPEC+, have agreed to cut output by 9.7 million barrels per day from May 1.

Several countries and regions, including China's central province of Hubei, where the novel coronavirus behind the pandemic was first detected, are relaxing lockdowns put in place to contain the virus.

"Global petroleum stock builds likely peaked in April as oil demand contracted by nearly 25 million bpd year-over-year," according to a BofA Global Research report.

"Now, countries are emerging from lockdown, boosting demand just when OPEC+ cuts are kicking in and producers elsewhere are cutting output."

Even so, there are doubts the production reduction, the largest ever agreed, will be enough as demand is unlikely to recover rapidly.

"The production cuts are finally kicking in," said Craig Erlam, analyst at brokerage OANDA. "Prices are still extremely low though and the next two weeks will likely see extreme volatility return."

A Reuters survey on Thursday showed that in advance of the new output cut, OPEC sharply raised production to the highest since March 2019, adding to the excess supply already in the market.

"The demand recovery will be a muted affair," said Stephen Brennock of oil broker PVM. "What's more, OPEC+ curbs which take effect today will be no panacea for the hefty supply imbalance."

Underlining the difficulties some producers will face in meeting their commitments, industry sources said Iraq would struggle to meet its quota of cutting output by nearly a quarter. Iraq is OPEC's second-largest producer.

Also supporting oil prices, the US Energy Information Administration said on Wednesday crude inventories rose by nine million barrels last week, less than the 10.6 million-barrel rise analysts had forecast.

"This is a second straight week of inventory and product demand figures suggesting a bottoming of the US market," said Stephen Innes, chief market strategist at AxiCorp.

The market was also looking for direction from the Baker Hughes' weekly US rig data at 1pm as an indicator of future oil output. Last week's data showed that US energy firms cut the most oil rigs in a month in April since 2015.

Published in The Express Tribune, May 2nd, 2020.

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