Factbox: Crude prices slide as 10 million b/d OPEC+ cut fails to impress market

New York —

Crude futures fell Thursday as an emergency OPEC+ group meeting resulted in a production cut agreement that was likely too limited in scope to compensate for the drop in global oil demand caused by the coronavirus pandemic.

OPEC and its allies on Thursday forged a historic agreement to claw back 10 million b/d of crude production, according to sources involved in the negotiations, under political and financial pressure to try and stem a bruising rout in oil prices caused by the coronavirus pandemic.

The deal would see the 23 members of the OPEC+ alliance, led by Saudi Arabia and Russia, coordinate the world’s largest production cut ever, just a month after the two countries launched a vicious price war that upended the oil industry and exacerbated fears of a global recession.

The cuts will cover the months of May and June, before being rolled back to 8 million b/d for the rest of 2020 and then down to 6 million b/d for 2021, sources said.

OPEC has not released a full breakdown of how the cuts will be divvied up, nor the baseline production levels from which the new quotas will be determined. But sources said every member would cut 22% of their output, with Saudi Arabia and Russia both committing to holding their production to 8.5 million b/d for the two months of the deal.

The cuts were much more limited in scope than markets had anticipated even earlier in the day. Oil prices spiked as much as 13% in the first minutes of the OPEC+ meeting on speculation that a broader deal might be at hand to take closer to 20 million b/d off the market. Front-month WTI settled down 9% in Thursday’s session to the lowest since April 1, the day before the OPEC+ meeting was announced.

OPEC+ ministers will meet again June 10 via videoconference to review market conditions and decide whether any changes are needed, sources said.

The OPEC secretariat’s analysis of the market now sees a 6.8 million b/d contraction in global oil demand for the whole of 2020, including close to 12 million b/d “and expanding” for the second quarter.

S&P Global Platts Analytics expects global oil demand to contract by 4.5 million b/d in 2020, down from a projected growth of 1.3 million b/d at the start of the year. But demand destruction is expected to peak in the near-term at around 20 million b/d.

“At the current rate of stock build, storage will be full at some point in May and crude production will need to be curtailed by 15-20 million b/d,” S&P Global Platts Analytics Global Head of Analytics Chris Midgley said. “The current proposed 10 million b/d may be too little too late as it will have limited impact on April production and only if sustained from May for the balance of the year might we avoid hitting tank tops. “

An emergency meeting of the G20 energy ministers is slated for Friday for other countries to discuss how much they might be willing to scale back crude production, potentially adding another 5 million b/d or so of cuts beyond OPEC+. But the US, the world’s largest producer, has continued to resist formally joining in on any deal, arguing that US cuts will come organically from the collapse in oil prices and global demand from the coronavirus pandemic.

US crude output fell 600,000 b/d to 12.4 million b/d during the week ended April 3, US Energy Information Administration data showed Wednesday. But US crude inventories still posted their largest-ever one week build that week, climbing 15.18 million barrels to 484.37 million barrels.

PRICES

Oil

**West Texas Intermediate at Midland, Texas was assessed by S&P Global Platts at $18.26/b Thursday, up from $10.09/b March 30, but down $40.84/b from January 20, when commodities markets first began reacting to the virus.

**Western Canadian Select at Hardisty, Alberta was assessed at $10.68/b Thursday, up from $8.03/b April 1, but down from $35.24/b January 20.

**Atlantic Basin physical crude price differentials are weakening because of the refinery run cuts, with West African Djeno crude, for instance, assessed at a $7.50/b discount to Brent Thursday, down from a $1.50/b discount March 2.

**Market participants expect Saudi Aramco could cut price differentials even further for its crude grades flowing east by $2-$3/b this month based on plunging demand and the sharp drop in underlying reference markers for Middle East crudes in Asia.

Jet

**Jet fuel prices have been hammered by the reduction in air travel. Scheduled airline global flying capacity for the week beginning April 6 has fallen by 23% to under 40 million seats compared with around 105 million in mid-January, data from digital flight information provider OAG showed.

**The front month May/June Singapore jet fuel swap spread sunk to a fresh record low for the second time this week Thursday at minus $3.64/b.

**The Singapore jet crack spread against Brent ended Thursday at minus $5.42/b, down from $11.34/b January 20.

**The Rotterdam jet fuel crack against Brent ended Thursday at minus $5.40/b, down from $14.17/b January 20.

**The New York Harbor jet crack against Brent ended Tuesday at minus $4.45/b, down from $14.19/b January 20.

Gasoline

**US state and local government stay-at-home orders have kept the vast majority of non-essential workers at home and sent gasoline demand down 48% from mid-March. Demand averaged at 5.07 million b/d last week, the lowest-ever level recorded in records dating back to February 1991, EIA reported Wednesday.

**The June NYMEX RBOB crack spread vs ICE Brent ended Thursday at around minus 50 cents/b, rising from minus $6.29/b March 23 as refiners have cut runs, but down from $12.60/b one month ago.

**The June NYMEX ULSD crack vs ICE Brent ended Thursday at $11.25/b, in sharply from near $20/b in late-March, but still holding up as trucking has been considered an “essential service,” leaving it largely unscathed by the ever-expanding lockdown orders. Truck travel represents around 70% of all diesel demand this time of year, according to Platts Analytics.

TRADE FLOWS

Storage

**With Saudi Arabia and Russia in a pricing war to flood the market with cheap crude, and refiners cutting runs on low demand, the crude contango has widened, encouraging global inventory builds.

**S&P Global Platts Analytics estimated there was potential storage capacity for crude, oil products and NGLs of 1.4 billion barrels, made up of about 1 billion barrels on land and 400 million barrels at sea. Tanks have filled up rapidly since January, growing by almost 1 billion barrels and is set to hit 1.3 billion barrels by the end of the month.

**With land options running out, the race to secure floating storage has picked up significantly in recent weeks, with up to 40 VLCCs and 20 Suezmaxes already placed on long-term chartering, according to S&P Global Platts estimates.

**Tightened availability for long-range tankers in Europe is pushing charterers to book medium-range tankers for clean product floating storage capacity.

**Gray Oak pipeline, the newest of the crude pipelines to carry Permian and Eagle Ford crude to the US Gulf Coast, filed with regulators for permission to accommodate on-system storage as both domestic and export demand for the crude collapses.

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**US commercial crude stocks saw their largest one-week build on record, surging 15.18 million barrels to 484.37 million barrels during the week ended April 3, US Energy Information Administration said. Inventories are now more than 2% above the five-year average for this time of year.

**Crude stocks at the major US storage hub of Cushing, Oklahoma, climbed 6.42 million barrels to 49.24 million barrels last week, putting tank levels there at an estimated 62% of working capacity.

**After Democrats in Congress blocked efforts to buy US crude for the Strategic Petroleum Reserve, the Department of Energy announced last week that it was making 30 million barrels of space available for US producers to store crude. The DOE said it would make an additional 47 million barrels of storage space, accounting for the remainder of its total capacity, available at a later date.

**Over the next few months, Platts Analytics sees global “massive” crude stock builds of 500 million barrels in its best case scenario, compared with the 1 billion-barrel build in its worst case scenario, relative to end February levels.

**A record 11.1 million barrels of LOOP Sour Crude oil storage was auctioned Tuesday, auction platform operator Matrix Markets said. During the monthly online auction 11,100 capacity allocation contracts, spanning from front-month May though the third quarter of 2021, were available to bidders.

**Saudi oil giant Saudi Aramco is moving a substantial amount of its crude to storage caverns in Rotterdam in the Netherlands and Sidi Kerir in Egypt. Around 800,000 b/d to 1 million b/d — or 10%-15% — of Saudi crude exports has recently traveled to Europe, with France, the Netherlands, Poland, Greece and Spain making up the key demand hubs, according to S&P Global Platts estimates.

**State-run Bangladesh Petroleum Corporation is set to halt refined oil product imports in May as a nationwide lockdown has dented domestic demand and reduced available storage capacity amid higher stocks.

Crude output and sales

**OPEC and its allies on Thursday forged a historic agreement to claw back 10 million b/d of crude production, according to sources involved in the negotiations, under political and financial pressure to try and stem a bruising rout in oil prices caused by the coronavirus pandemic.

**The cuts will cover the months of May and June, before being rolled back to 8 million b/d for the rest of 2020 and then down to 6 million b/d for 2021, sources said.

**OPEC has not released a full breakdown of how the cuts will be divvied up, nor the baseline production levels from which the new quotas will be determined. But sources said every member would cut 22% of their output, with Saudi Arabia and Russia both committing to holding their production to 8.5 million b/d for the two months of the deal.

**OPEC pumped a three-month high of 28.97 million b/d in March, with several members busting their previous OPEC+ production quotas even though they weren’t set to expire until the end of the month, an S&P Global Platts survey found.

**There was no representative at the OPEC+ meeting Thursday, though US Energy Secretary Dan Brouillette is scheduled to take part in the G20 ministerial on Friday where he is expected to argue that economically forced shut-ins of shale production would be the US contribution to any deal — a notion Russia has rejected, calling on the US to institute voluntary cuts.

**A formal US cut could potentially come from Texas, with the Texas Railroad Commission, which regulates the oil sector and has a meeting scheduled for April 14 to discuss mandatory production cuts in the state. But commissioners have said they would only consider such measures if they are part of a coordinated global effort, and even then there is a lot of dissension on the topic in the state and energy sector.

**Plunging oil demand and dwindling storage options — not any supply-cut coordination with Saudi Arabia and Russia — will force US producers to voluntarily cut output by about 30%-35%, Harold Hamm, Continental Resources executive chairman, said in an interview Monday.

**The US Energy Information Administration on Tuesday cut its US oil output forecast by 1.23 million b/d to 11.76 million b/d for 2020 and by 1.63 million to 11.03 million b/d for 2021. Weekly US crude output dipped 600,000 b/d to 12.4 million b/d last week, the weakest since September, EIA reported Wednesday.

**Spanish integrated energy group Repsol’s upstream oil and gas production in the first quarter of 2020 fell 3% from the previous quarter to 710,000 b/d of oil equivalent.

**More than 25% of the world’s crude supplies have cash costs greater than $15/b, and that’s not counting the up-front capital costs, so barrels are going to come off the market deal or no deal, according to a Raymond James report.

**BP is re-evaluating its planned upstream portfolio to sideline projects with breakeven costs above $25/b, a company source told Platts on Wednesday.

**Petroecuador has declared force majeure on crude exports and oil product imports because maritime operations at the company’s terminals have been affected by Ecuador’s state of emergency due to the coronavirus pandemic. Petroecuador ships an average of 6 million barrels of Oriente and 5 million barrels of Napo on a monthly basis.

**Loadings of Nigeria’s key export grade Forcados are on force majeure after pipeline operator Heritage Energy shut the Trans Forcados pipeline over the weekend, terminal operator Shell said Thursday.

**The return of Chinese crude purchases may be a bright spot for US crude exporters, at least temporarily. Platts trade flow software cFlow data shows a 2 million-barrel cargo loading at the Louisiana Offshore Oil Port on March 31 for transit to China, the largest monthly volume of US crude heading to China since September 2019.

**Argentina’s YPF offered a rare 1-million barrel cargo of Canadon Seco crude for April loading, and a 1-million barrel cargo of Medanito for April loading. YPF has cut refinery runs on low demand, and is thus offering Canadon Seco crude for export for the first time in 20 years.

INFRASTRUCTURE

Upstream

**Global producers have announced spending cuts and reduced operations because of low prices, with the bulk of the cuts coming from North America.

**More than 1 million b/d shut-ins at the wellhead, nearly all in the price-sensitive US shale sector, have already been announced with spending and rig counts dropping daily.

**Marathon Oil on Wednesday shaved $600 million off its 2020 capital expenditure guidance, adding to a $500 million reduction announced in early March.

**Galp, Portugal’s largest oil and gas company, on Wednesday cut its capital and operating expenditure by more than Eur500 million for 2020 and 2021, a 41%-50% reduction.

**ExxonMobil said Tuesday it will slash its 2020 capital spending by $10 billion as North America’s largest energy company cuts its bottom line deeper than the other integrated oil majors around the world.

**The cuts have begun to materialize in weekly rig activity. The US oil and natural gas rig count fell by 80 to 641 over the past week, the biggest decline in more than five years, rig data provider Enverus said Thursday. Since March 11, the domestic rig count total is down nearly a quarter, falling 23%, or 194 rigs, from 835.

**Mexican president Andres Manuel Lopez Obrador said his government will grant a tax cut worth 65 billion pesos ($2.6 billion) to state-controlled Pemex in order to cope with the impacts of the coronavirus pandemic and the collapse of the international oil price.

**Brazil’s National Petroleum Agency, or ANP, suspended the 17th bid round sale of oil and natural gas exploration and production concessions scheduled for the second half of 2020. The round was expected to include 128 offshore blocks located in deep or ultra-deep waters of the Campos, Para-Maranhao, Pelotas, Potiguar and Santos basins.

**A plunge in prices has slashed the profit potential for oil production in Argentina, raising concerns that a cutback in investment could stymie the development of Vaca Muerta, its biggest shale play — and one of the largest in the world.

Downstream

**Global refiners have slashed runs in response to lower demand for transportation fuels. Platts Analytics expects second quarter runs to be 10 million b/d lower in 2020 than in 2019.

**Global oil demand is on track to collapse by 9.4 million b/d this year, or 9.4%, due to national lockdown measures aimed at slowing the spread of the pandemic, Norwegian consultancy Rystad Energy said Wednesday.

**Separately, London-based Fact Global Energy said it sees global oil demand down by 7.9 million b/d in 2020, with April showing the strongest contraction of 24 million b/d year on year.

**Platts Analytics expects 2.25 million b/d of US run cuts will occur in early April, but sees European refining outages lessening slightly in the week ended April 10 to 1.8 million b/d compared with the record high level of 2.2 million b/d in the week ended March 27.

**HollyFrontier on Wednesday said it will cut rates to 70% at its refineries as it looks to manage demand destruction brought upon by the coronavirus pandemic.

**Marathon Petroleum will idle its 26,000 b/d Gallup, New Mexico refinery, the smallest in its 16 refinery system.

**India’s No. 1 state-run refiner Indian Oil Corp has cut crude throughput by 50% at its nine refineries, oil ministry officials said Thursday.

**Fujairah port, the Middle East’s crude products storage and trading hub, put plans on hold to expand its storage capacity because of slumping global. Fujairah, which currently has crude and oil products storage capacity exceeding 10 million cu m had plans to reach up to 16 million cu m in 2023.

**Japanese refiners are considering cutting operating rates further in April – despite the rate in March falling to the typical turnaround level before the maintenance season has started.

**On Wednesday, Sasol announced it would idle its 108,500 b/d Natref refinery until further notice starting Thursday April 9.

**Some refiners in Asia have lifted run rates in response to improved margins. The average run rate at China’s independent refineries in eastern Shandong province has recovered to around 58.9% in March, from a four-year low of around 44% in February.

**Taiwan’s Formosa Petrochemical has raised operations at its No. 1 and No. 2 steam crackers from 90% of capacity to 100% this month in response to plunging Naphtha prices.

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