Russia and Saudi Arabia worked out their differences, leading to a oil production cut. However, it’s unlikely to have the desired effect.
Saudi Arabia and Russia worked through their differences, leading to an agreement for a record cut in oil production worldwide in hopes of raising prices for crude oil and gasoline.
OPEC agreed to cut 10 million barrels a day, about 10% of their production, while the rest of the world’s producers are cutting 5 million barrels from their daily output. The move was designed to stem the tide of falling prices; however, in the short term it’s had the opposite effect.
Oil prices moved lower on Thursday because investors aren’t sure the move will have the desired impact because demand is low and there is still a massive amount of supply for the market due to the coronavirus. The markets are shut down until April 14 as talks continue.
(Trump threatens tariffs as gasoline prices waver in face of virus.)
Gas prices are averaging $1.92 a gallon across the U.S.; however, there are plenty of locations where it has fallen to less than $1 a gallon.
“The reported OPEC+ production cut of 10 million barrels a day, if ratified, just isn’t enough to plug the 15- to 20-million b/d near-term imbalance in the marketplace and avoid tank tops in May,” S&P Global wrote in a research note.
U.S. West Texas Intermediate fell 9.29%, or $2.33, to settle at $22.76 per barrel, CNBC.com reported. Earlier in the day, the contract had been up more than 12% trade at a session high of $28.36. International benchmark Brent crude slipped 4.14% to settle at $31.48, after earlier hitting a high of $36.40.
The spike occurred because rumors floated that the cuts would be 20 million barrels a day — a number that investors clearly saw as making an impact. However, now prices are likely to remain low, analysts believe.
(National average for gas prices tumbles below $2 a gallon.)
“The market has been underwhelmed by the proposed 10m/bd production cut, perhaps because of early expectations of a massive 20m/bd reduction,” said Helima Croft, RBC’s global head of commodities research. “However we contend that it is crucial to turn off the tap off the tap in the midst of colossal demand crash and bring the price war to a swift conclusion.”
A Detroit gas station shows a price of just $1.39 a gallon – and there were lower prices at some stations around the metro area.
Complicating the efforts to drive prices up is that Mexico has not agreed to go along with the plan. The country has agreed to cut some production, but not at the levels the rest of the producers have agreed to, jeopardizing the entire agreement.
OPEC said in a statement that the initial 10 million barrels per day cut would last in May and June, before tapering to 8 million barrels per day for the rest of the year. Beginning in January 2021, the cuts would decrease to 6 million barrels per day, which would continue through April 2022, according to the statement.
(Gas prices tumble as coronavirus strikes the U.S.)
Total oil stocks in the United States are up by 86.5 MMbbl, about 7%, compared with a year ago and stand at 1.32 billion barrels (excluding the Strategic Petroleum Reserve), according to the Energy Information Administration.