Oil output reductions won’t offset sharp demand fall

Oil output reductions won’t offset sharp demand fall

BAKU, Azerbaijan, May 4

By Leman Zeynalova - Trend:

Oil output reductions won’t offset sharp demand fall, says Rystad Energy, independent energy research and business intelligence company, Trend reports.

The company says that the gains that oil prices enjoyed last week were not justified, despite the start of the production cuts that OPEC+ has agreed on.

The market slowly but surely realized that the agreed output reductions are nowhere close to offsetting the sharp demand fall during the second quarter, reads the report from Rystad Energy.

OPEC+ countries decided to adjust downwards their overall crude oil production by 9.7 mb/d, starting on 1 May 2020, for an initial period of two months that concludes on 30 June 2020. For the subsequent period of 6 months, from 1 July 2020 to 31 December 2020, the total adjustment agreed will be 7.7 mb/d. It will be followed by a 5.8 mb/d adjustment for a period of 16 months, from 1 January 2021 to 30 April 2022. The baseline for the calculation of the adjustments is the oil production of October 2018, except for the Kingdom of Saudi Arabia and The Russian Federation, both with the same baseline level of 11.0 mb/d. The agreement will be valid until 30 April 2022, however, the extension of this agreement will be reviewed during December 2021.

“Cutting, in effect, a few million barrels per day cannot cancel the amount of oil that has been pumped so far. Producers have been extracting oil like there was no tomorrow, working on a maximum mode until the end of last month. Many of those barrels produced are still on route to their destination, having created an impossible storage situation,” reads the report.

The company believes that to make matters worse, the supply glut, although smaller than April, is still vast (calculated at around 13 million bpd of oversupply for May).

“We are in a race of two forces now: the storage filling rate and how quickly global oil demand will rebound. Under the current production surplus, storages are still expected to fill before demand manages to bridge the gap, which is set to reduce prices to their lowest levels in this crisis during May, paired with more forced production shut-ins globally.”

Rystad Energy said that demand projections have sobered up last week’s enthusiasm and this, together with the prospect of new US-China trade tensions, have weighted heavily on prices today.

“The price swings we are seeing should not be much of a surprise though, if we consider how commodities markets work: Think of it this way: If you’re a trader you hold your portfolio on positive speculation and sell it off when the enthusiasm subsides. When the market is on a calculated decline though, such bounces in prices are short lived, till the bottom is reached. And the bottom is still ahead of us.”

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Follow the author on Twitter: @Lyaman_Zeyn

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