By Barani Krishnan
Investing.com – It takes the person who some consider the real boss of OPEC, Vladimir Putin, to calm the oil market.
Crude prices snapped a three-day selloff, rising about 1% or more, as the Russian president reportedly sought counsel on production cuts proposed by a world alliance of oil producers to mitigate lost demand from the coronavirus crisis.
A technical committee of the OPEC+ alliance suggested last week that an additional 600,000 barrels per day be taken off the market, on top of other reductions that producers have carried out over three years now. Yet Russia, the most important ally of OPEC kingpin Saudi Arabia, had hesitated in approving the plan for fear that deeper cuts could hand over crucial market share to U.S. oil drillers, who will never be a part of OPEC.
The Russian deference sent crude prices further into bear-market territory, projecting Putin as the actual power behind OPEC despite Saudi Arabia’s stewardship of the cartel over the past 60 years.
In Tuesday’s session, Brent, the London-traded global benchmark for crude, settled up 74 cents, or 1.4%, at $54.01 per barrel.
New York-traded West Texas Intermediate, U.S. crude benchmark, closed up 37 cents, or 0.7%, at $49.94.
OIl prices came off the day’s highs after the U.S. Energy Information Administration said in its Short-Term Energy Outlook that it expected crude to remain below $60 per barrel until the end of June at least due to the coronavirus crisis.
The EIA also cut its outlook for world energy demand, projecting global consumption of petroleum and liquid fuels to grow by 1 million bpd in 2020, down 30% from the growth of 1.3 million bpd it projected in its January.
Despite Tuesday’s rebound, both Brent and WTI remained down about 18% since the start of the year.
Putin met Igor Sechin, his energy tsar, on Tuesday, the Kremlin said, but it gave no indication on whether Moscow is willing to accept the OPEC+ proposal to further curb production, Reuters reported.
No other details from the meeting were disclosed.
Sechin, chief executive of Russia’s largest oil producer Rosneft, has openly criticised the existing deal, saying it helps the United States increase its dominance of the global oil market while countries taking part lose out.
According to transcripts published on the Kremlin website, Sechin told Putin that the existing OPEC+ production cuts restrained the company’s hydrocarbon production, which remained flat in 2019.
“Rosneft is the biggest oil company so we can’t rule out that the two people would discuss this,” a Kremlin spokesman, Dmitry Peskov, said before the meeting when asked whether Putin and Sechin would discuss the OPEC+ proposal.
According to Reuters, Rosneft declined to comment on what was discussed and Peskov did not immediately respond to a request for comment after the meeting.
Yet Russian Energy Minister Alexander Novak said that Russia was still studying the deeper cuts by OPEC+. That lifted the hopes of oil bulls.
Aside from the absolute loss from 2020 highs of $71.75 for Brent and $65.65 for WTI, both benchmarks have also slipped into what is known as contango, a situation in commodity markets where the front month trades at a discount to farther-out months for oil delivery.
The contango in Brent’s and WTI’s front months versus the second is currently at around 20 cents per barrel.
The problem with contango is that it doesn't benefit the funds that invest passively in commodities. These funds maintain their positions by moving from an expiring front-month into the nearby position. The switch, or roll, incurs losses when the move involves a costlier contract.
Deep contango can result in the kind of massive oil storing seen during 2014-2016 as those holding physical barrels become determined not to be forced into a fire sale of the commodity as dictated by futures prices. Such storage dynamics, typically, add to further weight on front-month prices.
Oslo-based Rystad estimates that global oil demand growth will fall by 900,000 barrels a day in the first quarter, with China accounting for one third of that.
“I think that almost all the demand losses will be front loaded into Q1 and early Q2, which suggests that we are going to see some shocking builds,” said Scott Shelton, energy futures broker at ICAP in Durham, N.C. “Is this priced? Possibly, but it’s going to be a constant stream of bad data for multiple months.”