This take from Goldman Sachs pretty much sums up the oil market’s reaction to Sunday’s agreement among OPEC+, the United States, Canada, Brazil, and various and sundry G20 oil producers to cut what could be generously calculated as 14.7 million barrels a day from the world’s oil production: The agreement, Goldman said was “historic but insufficient.”
The investment bank noted that cuts of this magnitude probably aren’t enough to make up for demand reductions of 35 million barrels a day due to the coronavirus recession.
As of 1 p.m., U.S. benchmark West Texas Intermediate was up 1.89% to $23.19. International benchmark Brent as higher by 2.03% to $32.12 a barrel.
Part of the day’s price movement came on a confusing tweet from President Donald Trump that claimed the cuts from OPEC+ were 20 million million barrels a day rather than the 10 million that the media are reporting.
Here’s the math as I know it from those reports.
In normal times world oil demand is around 100 million barrels a day. The coronavirus recession, however, has lopped 35% off “normal” demand. So call current oil demand about 65 million barrels a day. On Sunday OPEC+–that’s OPEC and producers like Russia and Mexico–agreed to cut 9.7 million barrels of oil production. A few other oil producers agreed to contribute cuts that on paper amount to another 5 million barrels day. I say on paper because the cuts from the United States, Brazil, Canada and other G20 countries don’t represent voluntary cuts to production, but instead are drops in production already created by lower oil prices.
But for the moment take all these cuts as actual cuts. So we’re talking about 14.7 million barrels of production cuts when the world has an oil surplus of supply over demand of roughly 35 million barrel.
The production restraints are set to last for about two years. OPEC will reduce the size of the cuts over time. After June, the 10 million barrel cut will be tapered to 7.6 million barrels a day until the end of the year, and then to 5.6 million through 2021 until April 2022.
That schedule seems a bit optimistic.
The deal doesn’t take effect until May 1 so oil producers are free to flood the market with oil for another three weeks. In the last month OPEC+ countries have significantly increased production.