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Friday, March 29, 2024

Oil Slides After OPEC’s Barkindo Warns Of “Horrifying” Fundamentals, Fears “Max’d Out” Storage In May

Courtesy of ZeroHedge View original post here.

Update (1155ET): According to a briefing document compiled by the secretariat for delegates seen by Bloomberg, OPEC says the current outlook for the global energy markets “looks extremely bleak.”

“For oil markets, the massive oil demand contraction is unprecedented; it is a level of retrenchment not previously seen in the industry’s history, costing us more than 15% of global oil consumption in the 2Q20.

The current outlook looks extremely bleak, with oil markets anticipated to be severely tested on many fronts.”

The document reportedly ended by saying they have no choice but to act.

“It is of the utmost importance and urgency to take bold, affirmative and strategic moves, taking on board the following key elements and considerations. The next few days and weeks will be critical as talks and negotiations resume among all OPEC and OPEC + parties, and with other producers. Any further delays in taking action may lead to the need for more extreme measures in the future.”

OPEC Secretary General Barkindo says oil market fundamentals are “horrifying,” and warns that Q2 excess supply is “beyond anything seen before,” adding that global crude storage could be exhausted in May.

It’s been quite a day in oil so far…

h/t @AWMCheung

*  *  *

Update 2: Even more headlines suggesting that OPEC is scrambling to get cuts from anywhere, including nations that will almost certainly not agree to be bound by any production cuts. As such the “deal”, and we use the term loosely for an agreeement that has so far been struck between only the Saudis and Russia, is as follows:

  • OPEC+ Will Make Full 10M B/D Output Cuts for 2 Months: Delegate
  • OPEC+ Will Extend Smaller Cuts for Longer Duration: Delegate
  • OPEC+ Still Debating Size, Duration of the Cuts: Delegate
  • OPEC+ Said to Seek as Much as 5M B/D Oil Cuts From G-20 Nations

As reported earlier, Saudi Arabia has agreed to 4 million barrels a day in cuts from its April production levels, or about 1 million from February before the Saudis boost production by 3 million b/d; Russia has agreed to cut 2 million barrels a day. This comes as Saudi Arabia and other oil exporters work to broker a global consensus on oil production cuts with a view to removing 20 million barrels a day from global supply.

In other words, the 10mmb/d cut is only for 2 months, with smaller cuts for a longer time (unclear how small and how long), and in the meantime other nations – i.e., the US – have to step up with promises of another 5 mmb/d in cuts over time (again unclear what this means).

Meanwhile, Iraq and other major oil exporting nations in the OPEC+ group are yet to agree on amount cuts.

Even if they do eventually agree, while this deal is by any measure a historic – if temporary – cut, it does nothing to balance a market that currently has between 27mm and 35mm b/d in less demand.

* * *

Update: even more headlines, with the 20MMb/d cut now seemingly a non-starter:

  • OPEC+ Outline Deal Is for 10M B/D Output Cut: Delegates
  • OPEC+ Still Working on Deal, Target May Change: Delegates

As a result, oil is paring its earlier gains as this latest headline contradicts earlier reports indicating as much as 20 million barrels would be. The reports also put estimates on individual country cuts, with the Saudis mulling a reduction of four million barrels a day and the Russians looking at two million barrels a day, as reported earlier.

So recapping what we know, Bloomberg reports that Saudi Arabia and Russia have agreed to make deep production cuts to rescue the market, all but making peace that ends a month-long oil price war. OPEC+ ministers are now debating the details of the deal, but its outline calls for a 10 million barrels a day reduction – the largest ever for the group. There will likely be extra “reductions” from non-OPEC+ countries tomorrow at the G-20 meeting, but those cuts aren’t voluntary ones, but rather driven by low prices and low demand.

* * *

With the virtual OPEC+ meeting starting the headlines and notorious jawbones and trial balloons are coming in fast, and Reuters reports that Saudi and Russia have reached a deal on deep oil output cuts, according to OPEC source while a senior Russian source says the two sides have agreed to remove their main obstacles to agreeing a new deal. As a reminder, earlier we reported that the two main sticking points between Saudi and Russia was the oil production date to use as a benchmark (with Saudi wanting April and Russia a average of Q1) as well as the size of the production cuts that are to be undertaken.

While details remain scarce, according to the WSJ’s Summer Said, Russia has agreed to a deal under which it would cut 2MM B/D. And while there is no confirmation there is speculation that Saudi Arabia would cut an additional 4MMB/D; it is unclear where the rest of the cuts will come from.

Separately, a Russian source said that OPEC+ is discussing oil cuts as large as 20MM B/D, with the caveat that this figure is just for discussion, and without any details on the breakdown. To be sure, while 20MM is a significant improvement from the 10-15 number thrown around before, it is till well below the 27MM B/D hit to April demand that various energy strategists have predicted.

Yesterday, Goldman said that any cuts beyond 10mmb/d would disproportionately impact Saudi Arabia which would have to shoulder the bulk of the cuts, so we would discount this particular news, although the oil market appears to be taking it at face value and oil surged on the news, although it has since pared some of the gains as rational minds realize that a 20mmb/d cut is virtually impossible without the participation of the US which as we know is not happening, at least not today.

One wildcard to keep in mind is that as Bloomberg notes, the OPEC+ meeting has been preceded by huge political pressure from the U.S. From President Donald Trump to Republican and Democrat lawmakers, everyone in Washington has pointedly asked Saudi Arabia to cut output and lift oil prices. The American political discourse has been colored by the experience of the 1973-74 oil crisis for 50 years. Since then, the U.S. has been against foreign oil and for cheap crude. The U.S. now accepts that ultra-low oil prices aren’t in its interest.

But if Saudi Arabia is indeed aiming to crush shale as Putin recently admitted, why would Saudi Arabia agree to cut production without a similar action by the US?

We’ll find out soon.

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