Oil set for further decline despite historic global output curbs

Crude benchmarks could fall by a further $5 to $10, analyst says

Global inventories at historically high levels are filling up storage space quickly. An oil tanker truck sits parked beside storage silos at the Erik Walther oil terminal in Germany. Bloomberg

Oil prices are set to fall further after US futures closed the week at 18-year lows in spite of a global pact to stabilise markets.

Brent and West Texas Intermediate, both crude commodity benchmarks, settled below $30 and $20 per barrel on Friday, at least 20 per cent lower than at the start of the week, as markets began to worry about the volume of cuts promised by producers.

The Opec+ alliance including Saudi Arabia and Russia pledged to cut back 9.7 million barrels per day in May and June, with tapered cuts set to hold until 2022.

Oil producers were nudged into a meeting by the US, the world's largest producer of crude. Involuntary commitments secured from other G20 nations means the overall volume of cuts could be as high as 20m bpd.

The commitment by producers to cut back has not had a lasting impact on markets weighed down by demand concerns.

The US crude benchmark, WTI, plunged to 18-year lows, settling at $18.27 per barrel on Friday. Brent also remained weak, closing at $28 per barrel. The benchmarks have lost nearly 70 per cent of their value from their most recent peak in January following the drop in global demand from the lockdowns enforced to contain the coronavirus pandemic.

The Opec+ agreement indicated 'bearishness' for the markets in the short term, even if it showed some positive signals for the future, noted Fereidun Fesharaki, chairman at London-based consultancy Facts Global Energy.

"It does not put a floor under the price of oil in the short term. We expect prices to fall further by $5-$10 per barrel once the market realises the Opec+ agreement is far less substantial than has been touted, as stocks keep building rapidly worldwide," he added.

Crude oil inventories rose by a record amount last week and will continue to build in the coming weeks, according to Ben Jones, a multi-asset class strategist at investment manager State Street Global Advisors.

The decline in demand "far outweighs the supply cuts", with gasoline sales reaching a record low in the US over the past week and fewer than 100,000 people passing through airports, Mr Jones said, citing Transportation Security Administration figures.

"Even when economies begin to open up again we do not expect people to rush to start travelling for ‘unnecessary’ reasons straight away, meaning the oil demand hangover will have a long tail," he said.

The rapid spread of the novel coronavirus known as Covid-19 has slashed oil demand to 29m bpd for April, the lowest since 1995, according to the International Energy Agency. The Paris-headquartered organisation also expects oil demand to decline by a record 9.3m bpd in 2020. Opec, in its monthly oil market report for April, sounded a slightly more optimistic note, forecasting a demand decline of around 6.8m bpd.

The Vienna-headquartered group of oil exporters cited the lockdown in China, the world's largest crude importer, in the first quarter as having a negative impact on demand.

"It [Covid-19] has since spread globally and is now affecting oil demand growth in most other countries and regions, with an unprecedented impact on global oil demand, transportation fuels in particular," Opec said.

Even as China eases lockdown measures and looks at restarting its economy, its economic data seems bleak, indicating tepid future demand growth. Data released on Friday showed gross domestic product shrank by 6.8 per cent year-on-year, the first contraction in the country since 1992.