COVID-19 To Keep Oil Prices At Luckluster Level Despite New OPEC+ Deal

The oil prices are unlikely to experience significant growth over the next months in the wake of a new OPEC+ deal, as the demand still suffers from the COVID-19 pandemic, experts told Sputnik

MOSCOW (UrduPoint News / Sputnik - 15th April, 2020) The oil prices are unlikely to experience significant growth over the next months in the wake of a new OPEC+ deal, as the demand still suffers from the COVID-19 pandemic, experts told Sputnik.

OPEC+ countries, as well as oil producers from a wider G20 group of nations such as the US, Brazil and Canada, reached what many have called a historic agreement on Sunday. The deal envisages a reduction in oil production by the OPEC+ group by 9.7 million barrels per day for two months starting on May 1, and possibly up to 15 million barrels per day with the G20 nations taken into account.

The International Energy Agency (IEA) on Wednesday lauded the agreement as "a solid start" on the path to offset the losses in energy demand. However, the agency warned that the OPEC+ deal would not have an immediate stabilizing effect on the market.

The market has indeed modestly reacted to the new oil cuts agreements, prompting the prices to jump by some 4-7 percent on Monday. On Tuesday, the price of Brent crude futures fell below $30 per barrel for the first time in the past six trading sessions, as it was trading in the range of $30-$37 last week on expectations of large cuts by the OPEC+ group.

The outlook for the energy prices in the coming weeks does not look bright as they are still facing "downward pressure" from missing the two important months when a response to the effects of the pandemic should have been taken, IEA chief Fatih Birol said Wednesday.

Alexander Dyukov, the CEO of Russian energy giant Gazprom Neft, echoed the idea that the OPEC+ deal would not prompt an immediate sharp rise in oil prices. Dyukov added, however, that should the international community manage to curb the COVID-19 outbreak, it is possible that prices could rise to between $40 and $45 a barrel by the end of the year.

COVID-19 CONTINUES TO PRESSURE THE MARKET

The outbreak of the coronavirus pandemic was the trigger of the crisis on the energy market this year, as it has drastically reduced air traffic worldwide, shut down production and forced many to work from home, driving demand for jet fuel and gasoline down. Experts warn that oil prices will significantly rise only when demand recovers.

"In the medium term, I can easily see oil prices falling again once inventory demand ceases. The price bump we see today as a result of the OPEC+ deal may thus be short-lived. Prices will only rise again when demand recovers, and that all depends on the time frame for our economies to recover from the COVID-19 crisis. Even with this recovery expected for 2020 [third quarter] or 2020 [fourth quarter], I do not see prices return to $70 [per barrel] where we started this year for quite some time," Werner Antweiler, a professor with the Sauder school of business at the University of British Columbia (UBC), told Sputnik.

As oil storages worldwide are getting full because of the falling demand, that also has a dampening effect on the prices, the expert noted.

"The outlook for oil prices remains bleak, with $40-50 [per barrel] by the end of the year the most optimistic scenario, and $30-40 [per barrel] more likely when looking at today's futures prices," Antweiler added.

Thijs Van de Graaf, an associate professor of International politics at the Ghent Institute for International Studies, also believes that the packed inventories would continue to hamper the growth of the oil prices.

"On current trends, storage facilities will be completely full by mid-May. Oil producers can at best hope that the current deal puts some floor under prices, rather than having them fall even more," Van de Graaf told Sputnik.

WHAT DOES THE FUTURE HOLD FOR OPEC++?

As the world has never seen such unity on the output cuts among oil-producing nations, many wonder about the longevity of the oil cuts agreement, now known as OPEC++ due to the involvement of some G20 members. According to the experts, the unlikely alliance may prove fragile.

"This group is a marriage of convenience that assembles such a wide and diverse group of countries that it is likely to fall apart sooner rather than later. We saw that with the recent brawl between Russia and Saudi Arabia. And Mexico's special treatment does not bode well for compliance. OPEC itself has a large history of endemic cheating on production targets. Why would the OPEC++ countries now stick to the deal if Mexico is allowed to free-ride on their efforts?" Van de Graaf said, referring to Mexico's initial refusal to cut production by the proposed 400,000 barrels per day and the United States' subsequent decision to step in and bear responsibility for the neighbor's output cuts.

Antweiler believes that the risks of the OPEC++ agreements falling apart in the near future are high, too.

"While the OPEC+ agreement is important, OPEC agreements in the past have been subject to instability sooner or later, one party may try to gain an advantage over competitors by deviating from the terms of the agreement. We will see what happens when oil markets hit the true 'crash point' when demand for inventory will cease because the tanks are full. At that point access and geography is what matters ... I see the distinct risk of markets disconnecting as regions that are self-sufficient (notably the United States) have the ability to curtail imports in order to protect domestic markets," the UBC professor concluded.

But there is still hope that the energy market will rebound by the end of the year.

The IEA said on Wednesday that the market would get back to normal conditions in the second half of 2020, when even an oil supply deficit may occur as a result of the output cuts by OPEC+.