Crude Oil Dives on Output Cut Worries

(Bloomberg) -- Oil sank to the weakest level since the start of the month as investors weighed whether the world’s biggest producers will be able to strike a deal that cuts enough output to offset an unprecedented demand loss from the coronavirus outbreak.

Futures in New York sank 9%, reversing an earlier gain. Saudi Arabia and Russia are hammering out terms to a production agreement with OPEC+ talks planned for Thursday and a G-20 meeting of energy ministers set for Friday, according to people familiar with the matter. The U.S. government estimated global petroleum demand will fall 12.2 million barrels a day in the second quarter from a year earlier

“There is a concern an OPEC+ deal is not enough or fast enough to prevent storage fills,” said Rebecca Babin, senior equity trader at CIBC Private Wealth Management.

Also, investor funds are rolling over their positions into the forwards months by selling the prompt futures contract. The largest oil ETF, United States Oil Fund, started its five-day roll period Tuesday, and this will end on April 13.

The fund is “selling the front month to buy the next three months,” Babin said, noting that the fund accounts for 10% of the open interest in the prompt contract.

The May-June West Texas Intermediate spread widened to a $5.06-a-barrel discount, the weakest since 2009. Supplies at the key Cushing, Oklahoma, storage hub are the highest since November and are set to grow as the virus continues to destroy demand.

U.S. crude futures are back well under $25 a barrel, down more than 60% this year. In response to weak prices, production has declined with some producers shutting wells. The Energy Information Administration cut its oil production forecast for this year by more than 1 million barrels a day and trimmed its 2021 output estimates by 1.6 million barrels a day.

Prices:

• WTI for May delivery settled down $2.45 to $23.63 a barrel in New York
• Brent for June settlement sank $1.18 to $31.87 a barrel

An effective supply deal will require all of the three top producers -- the U.S., Saudi Arabia and Russia -- to participate. While Riyadh and Moscow are set to cut output significantly, according to people with knowledge of the negotiations, Washington is more likely to offer up gradual reductions. The G-20 may be a more acceptable forum to bring on board the U.S. and other big producers outside the OPEC+ alliance, such as Canada and Brazil.

Even if a production-cut deal is reached, the bigger question is whether reductions would be enough to offset a demand meltdown spurred by the Covid-19 outbreak.

The industry-funded American Petroleum Institute will release its weekly petroleum stockpile estimates Tuesday afternoon, while the EIA will publish its data Wednesday. Analysts are estimating a 9.25 million barrel increase crude inventories last week.

Meanwhile, some old-guard Texas oil drillers are urging state regulators to clamp down on crude output. The largest U.S. oil-producing state hasn’t restricted production in almost 50 years but a growing chorus of explorers and related industries are advocating just such a move.

Other oil-market news

• The U.S. cut its 2020 oil production forecast by more than 1 million barrels a day, as collapsing crude prices and plummeting demand threaten to shutter production in the country’s biggest fields.
• Oil refineries in China, the world’s biggest crude importer, may increase processing rates to near last year’s average levels this month, providing a glimmer of hope to a global market reeling from the coronavirus.
• If rock-bottom crude prices and threats from President Donald Trump aren’t enough to force Moscow into cutting production, the country’s limited number of oil tanks might do the job.
• Investors looking to call the bottom of oil’s plunge are helping prop up futures prices even as the physical market slumps.

--With assistance from Elizabeth Low, James Thornhill and Alex Longley.

To contact the reporter on this story:
Sheela Tobben in New York at vtobben@bloomberg.net

To contact the editors responsible for this story:
David Marino at dmarino4@bloomberg.net
Mike Jeffers, Joe Richter