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James Hyerczyk

U.S. West Texas Intermediate and International-benchmark Brent crude oil futures finished lower last week as the hopes created by a massive production cut fizzled nearly before the ink dried on the OPEC+ deal. Meanwhile, the coronavirus continued to destroy demand, putting the existence of a few U.S. energy companies at risk.

Last week, June WTI crude oil settled at $25.03, down $4.23 or -14.46% and June Brent crude oil finished at $28.08, down $3.66 or -13.03%.

Promising Start to the Week

The week started out promising for crude oil traders, hoping for a boost in prices to shore up the U.S. oil industry and to stabilize prices. OPEC, Russia and other oil producing nations overcame a slight snag and finally agreed on Sunday to cut output by a record 9.7 million barrels per day for May-June, representing around 10% of global supply, to support oil prices amid the pandemic, according to Reuters.

The cut was the single largest output cut in history. The specific production numbers weren’t released, but we do know that the 9.7 million barrels per day cut will begin on May 1, and will extend through the end of June.

However, despite the efforts of OPEC+, oil prices continued to retreat throughout the week, hitting a multi-year low in the process.

As it turns out, the agreement wasn’t especially bullish. The production cuts were smaller than what the market needed and all they are likely to do is slow down the stock building constraints problem.

The move by OPEC+ is not big enough to plug the near-term imbalance, which could reach 15 to 20 million barrels per day. Additionally, storage tanks are expected to top out in May. Furthermore, the cuts are too short, ending in June. This is hardly enough time to bring stability and restore support to oil prices, leading some to speculate that OPEC may have to revisit the problem in June.

The cuts may make a difference during the second half of 2020, but that will likely accompany an uptick in demand if the world can gain control of the coronavirus outbreak.

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Dire Forecast from International Energy Agency

The International Energy Agency (IEA) on Wednesday forecast a 29 million barrel per day (bpd) dive in April oil demand to levels not seen in 25 years and warned no output cut by producers could fully offset the near-term falls facing the market.

The IEA forecast a 9.3 million bpd drop in demand for 2020 despite what it called a “solid start” by producers following a record deal to curb supply in response to the coronavirus pandemic.

“By lowering the peak of the supply overhang and flattening the curve of the build-up in stocks, they help a complex system absorb the worst of this crisis,” the Paris-based IEA said in its monthly report.

“There is no feasible agreement that could cut supply by enough to offset such near-term demand losses. However, the past week’s achievements are a solid start.”

US Government Reports Record Rise in Crude Supplies

The Energy Information Administration reported a rise of 19.2 million barrels in domestic crude supplies for the week ended April 10. That was the 12th straight weekly climb. Analysts expected the data to show a rise of 10.1 million barrels.

Data from the EIA also showed that total U.S. crude production fell by 100,000 barrels a day to 12.3 million barrels. Gasoline supply rose 4.9 million barrels and distillate stockpiles added 6.3 million barrels, the EIA said. An analyst survey had shown expectations for a supply rise of 7.1 million barrels for gasoline, and distillate stockpiles were expected to climb by 1.8 million barrels.

Weekly Forecast

The bearish tone in the crude oil market is likely to continue this week with prices being weighed down by the IEA’s forecast for a plunge in demand and the huge supply as reported by the EIA.

Traders said the U.S. futures contract is also be weighed down by the rapidly-filling crude storage tanks. Traders are also in no hurry to buy crude with limited facilities to store it, and as refinery runs continue to be reduced tremendously.

Other than a periodic short-covering rally due to oversold technical conditions, crude oil is going to have a hard time rallying unless there is a major reduction in the number of coronavirus cases and an extremely successful reopening of the global economy, not just the U.S. economy. Furthermore, traders want to see meaningful production cuts from outside the OPEC+ group. Eventually, market forces are going to force U.S. producers to cut back. This could provide some stability to the market.

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