Despite the deal between OPEC, Russia, and the United States to reduce oil production in the face of historically low demand, the oil industry is likely to feel a continued pinch due to the still increasing global inventory and rapidly dwindling inventory space.
Thursday was the second day in a row that oil traded below $20, a grim symptom of a market struggling to produce revenue amid historically low demand. The market was almost entirely unphased by the news of OPEC+'s 10% production cut. Concerns are mounting that the cut may not be enough; oil production will continue at a lower volume, but even lower production volumes will still contribute to a severely oversaturated market.
Bart Melek, head of Commodity Strategy at TD Securities, was one to voice concern that the production cuts would not be enough to balance the ailing market. "There is a good chance, that over the short run, we might even be lower here," Melek said. Melek was joined by Rebecca Babin, a Senior Equity Trader at CIBC Private Wealth Management. "This OPEC deal is great and good but it doesn't help us over the next thirty days. Even with the OPEC agreement, the size and timing of it is not enough to alleviate potential storage issues in the near term." Babin told Bloomberg by phone.
Supporting this assertion are the recent findings by the Energy Information Administration that the U.S. had added an estimated 19.2 million barrels to the already overstocked domestic inventory. Before the deal, oil inventories were already dangerously close to capacity, with some grades even trading in the negative as oil producers pay out of pocket for storage. The reduction of almost ten million barrels per day might provide a modicum of relief. Still, according to analysis, the market may require double that for production cuts to have any substantial effect.
Given the political tensions between OPEC members and the various members of the OPEC+ cartel and the difficulties in securing the ten-million-barrel cut, the prospects on further cuts do not look particularly good.
It would appear, then, that the oil market is locked on course for what may very well be its worst year on record. Unless additional cuts are made, the only relief for the oil industry will come through the relaxing of social distancing measures, which should see a return in demand, however gradual or immediate it may be. It is hard to say, however, how soon the cessation of social distancing measures will begin. In the United States, at least, it would appear that measures may remain in place longer than previously anticipated as State Governors extend stay-at-home orders into the near future.