The most ambitious oil production cuts in history will not keep global oil prices afloat in the coming months as the coronavirus continues to take its toll, according to investors.
Oil prices began to slide hours after the world’s biggest producers agreed to make record cuts to their output, prompted by fears that the plan to shore up the global market may not be enough.
Despite plans from the Opec oil cartel and its allies to hold back about 10% of the world’s supplies, or nearly 10m barrels a day, the price of Brent crude retreated to just above $30 a barrel on Monday morning.
The oil price steadied at just below $32 a barrel by the afternoon, but remained well below the $36 mark reached earlier this month in anticipation of the deal. The oil market began the year at $65 a barrel.
The rare global co-operation pact hammered out over the Easter weekend was backed by G20 nations outside of the Opec+ alliance including the US, Canada and Norway. Saudi Arabia’s energy minister, Prince Abdulaziz bin Salman, told reporters the deal would help deepen the Opec+ production cuts to about 19.5m barrels of oil a day in total.
He said the G20 nations plan to cut about 3.7m barrels of oil a day from the world’s global production. At the same time the Internal Energy Agency has agreed to buy 200m barrels of oil over the next few months which will be held in strategic reserve.
But industry experts fear the plan will not counter the debilitating effectthe coronavirus pandemic has had on global oil demand and leave the market oversupplied with crude for most of the year.
Goldman Sachs warned that the “historic but insufficient” deal would not go far enough to prevent supplies from overwhelming the world’s oil storage facilities and forcing producers to shut their wells.
The US bank said oil prices would fall further in the coming weeks because the voluntary production cuts brokered by Opec were “still too little and too late” to tackle a 19m barrel a day demand slump during April and May.
Market analysts at the French investment bank BNP Paribas said the deal may “at best” help to set a floor on the market’s sliding oil prices before a recovery was possible later this year.
Donald Trump said the plan to cut 20m barrels a day from global oil production would ensure that the energy industry is “strong again, far faster than currently anticipated”.
“Having been involved in the negotiations, to put it mildly, the number that Opec+ is looking to cut is 20 million barrels a day, not the 10 million that is generally being reported,” the US president said on Twitter.
Opec plans to keep a hold on oil production until April next year. This may help to buoy prices in the second half of the year as demand for oil to produce transport fuels begins to recover as coronavirus travel restrictions ease.
Morgan Stanley lifted its forecasts for oil prices for the second half of the year by $5 to between $30 and $35 a barrel, and Citi believes prices could climb to between $35 and $45 a barrel.
Energy market experts at Rystad Energy said oil prices would be unlikely to return to pre-coronavirus levels this year, despite production cuts, because surplus oil supplies have already created a glut in the market.
“It will take some time for the stocks to fall back,” the analysts said. “After weeks of volatility, the market is now reacting with more caution to speculation and waits for concrete agreements to risk hiking prices to different levels.”
Brent crude climbed from 18-year lows of below $23 a barrel earlier this month to more than $36 a barrel last week, as talks between Saudi Arabia and Russia appeared to signal an end to a bitter price war that threatened to compound the impact of the pandemic on the oil market.