“The historic agreement that we saw…is only 10 mb/d. But that is only half of the story,” U.S. Secretary of Energy Dan Brouillette said on Fox Business. “When you add up all of the production cuts around the world, we are going to be much closer to 20 mb/d coming off the market.”
After several days of negotiations, OPEC+ pulled off a historic production cut of around 10 million barrels per day. Additional cuts from a series of non-OPEC countries, including the U.S., magnified the headline number, although those cuts are not mandatory. Instead, the market is going to force shut ins, a trend for which the Trump administration is taking credit as a “cut.”
Through some optimistic accounting, the Trump administration billed the deal as a cut of nearly 20 mb/d. In reality, the figure will be much smaller. In any event, the drop in global demand exceeds the cuts by so much that oil prices were flat on Monday.
That’s not to say the deal will have no effect at all. Instead, it could prevent a more catastrophic meltdown, even if it doesn’t rally prices anytime soon. “Having looked into the abyss three weeks ago, the deal should provide some stability to global oil prices and reduce volatility,” Bank of America Merrill Lynch wrote in a note on Monday.
The deal mitigates some of the destruction in the U.S. shale patch. Bank of America (NYSE:BAC) predicted that U.S. oil production would have fallen by as much as 3.5 mb/d by the end of next year absent a deal. The cuts announced by OPEC+ could translate into a drop in U.S. production by a more modest 1.8 mb/d instead.
Nevertheless, the current meltdown is already having an effect. The North American oil industry has announced roughly $50 billion in spending cuts over the past month, according to the Wall Street Journal. The U.S. and Canada have shelved more than 300 rigs since mid-March.
The Canadian rig count is down to 35, a record low. There were 240 rigs operating in Canada as recently as late February. Output in Canada is already down by 325,000 bpd.
Shut ins have already begun. Continental Resources said it would cut output by 30 percent for April and May. Concho Resources (NYSE:CXO) began shutting in wells in the Permian last week. Parsley Energy has shuttered production at 150 wells. As the WSJ notes, many other smaller companies are shutting in.
The drop in demand is simply too large. In the short run, demand is down by 25 to 30 mb/d, according to an array of analysts. Bank of America sees demand falling by 9.2 mb/d for the full year in 2020, a larger decline than the 4.4 mb/d the bank previously predicted. “The demand implosion is immediate and deep, while the supply decline will likely happen in stages,” Bank of America said. “So plenty of downside risks remain.”
The OPEC+ cuts, as extraordinary as they are, cannot offset the hit to demand. Goldman Sachs called the deal “too little and too late.” JBC Energy called the deal “just a plaster on an open wound.”
“[A]ny expectations that this will stem the tide of weak physical outright prices in the weeks ahead are likely misplaced,” JBC said. “[T]he prospect of reaching tank tops remains a real one in our model numbers despite the OPEC+ deal.”
There are also questions about whether all parties will fulfill their commitments. Mexico objected to 400,000 bpd of cuts, instead agreeing to cut by only 100,000 bpd. But they were at least upfront about it. Other countries may simply continue to overproduce. “[T]here are a number of commitments which appear highly unlikely to come to full fruition, to say the least, with -23% cut pledges from the likes of Nigeria, Kazakhstan, and Iraq looking like a stretch by any historic compliance measure,” JBC warned.
On Monday, the first trading day after the OPEC+ agreement was announced, WTI was trading at about $22 per barrel. A week earlier, prior to the agreement, WTI was at $26 per barrel.