April 6, 2020 / 2:21 AM / 3 months ago

Crude oil's wild ride doesn't answer the serious questions: Russell

LAUNCESTON, Australia (Reuters) - Crude oil’s rollercoaster ride resumed on Monday, with both Brent and West Texas Intermediate (WTI) futures falling sharply amid news of a delay to a meeting of oil producers.

FILE PHOTO: The sun is seen behind a crude oil pump jack in the Permian Basin in Loving County, Texas, U.S., November 22, 2019. Picture taken November 22, 2019. REUTERS/Angus Mordant/File Photo

While news headlines are driving the short-term volatility in crude prices, it’s perhaps a worthwhile exercise to take a stand back look at what is actually happening, what is likely to happen and what’s unlikely.

Brent crude fell as much as 12% in early Asian trade on Monday, dropping as low as $30.03 a barrel before recovering to trade around $31.85, while WTI dropped as much as 11% to a low of $25.28.

The decline was driven by a decision to delay from Monday to Thursday a meeting between the Organization of the Petroleum Exporting Countries (OPEC) and Russia.

The talks aim to discuss re-imposing output cuts to help deal with the massive supply overhang created by the loss of around 25 million barrels per day (bpd) of demand due to the new coronavirus locking down much of the world’s economy.

Monday’s slump in crude benchmarks came after a strong surge on April 2 and 3, with Brent gaining 38% and WTI 39.5% over the two days as the market reacted to U.S. President Donald Trump’s tweets that a deal to cut output was imminent.

It appears the mercurial U.S. leader may have been jumping the gun somewhat, although it also appears that some efforts are underway.

So, what exactly is known and what is still unknown?

Known: There are behind-the-scenes machinations to get crude producers to agree to some form of output cut.

Unknown: How far advanced are these discussions, who will be doing the cutting, will it be just OPEC and its former allies, including Russia, in the group known as OPEC+? Or will other producers such as the United States, Brazil, Canada and Norway be expected to participate?

Unknown: Will countries that produce oil, but not enough to meet domestic needs and therefore still import, such as China and Britain, also be expected to cut output?

Unknown: What will be the size of the production cut, assuming one can be agreed?

As can be seen from the above, what is known is very little, what is unknown is vastly greater, although there are plenty of analysts and commentators prepared to speculate on a whole range of possible outcomes and their ramifications.

Perhaps the most important thing to speculate on is how big any output cut will be, assumed one can be reached.

Most of the speculation has centred around 10 to 15 million bpd, raising the question as to whether that would be enough.

It certainly won’t be enough to wipe out the current supply glut, but it may be enough to slow the rate at which available storage fills, and thereby bring some stability back to the market.


This brings us back to a few more knowns and unknowns.

Known: The new coronavirus has spread rapidly across the world and has led to a near collapse of airline and other travel, and the shutting down of large parts of the world economy.

Unknown: There is a wide range of forecasts as to how big the hit to crude demand is going to be, and if there is a consensus, it’s that the shock will be between 20 and 30 million bpd, or between 20% and 30% of total demand.

Unknown: The assumption is that this will be a sharp, but also short, demand shock and the world economy will be open for business quickly once the coronavirus is contained. The risk is that much of the global economy remains in some form of hibernation for longer than expected, and that the recovery is uneven as some countries emerge faster than others.

Another factor at times of high volatility in crude markets is to try to separate the news that actually matters from the noise.

President Trump is a great example of an important figure who sometimes delivers news that matters, but also thought bubbles that capture attention, but are of limited value.

The tweets on the output deal may have overstated the actual closeness of a deal, but they did focus the market attention on the manoeuvres underway.

However, Trump’s comments on Sunday that he was prepared to do “very substantial tariffs” if the oil price stays depressed are perhaps less helpful.

It’s unlikely that the U.S. government would impose tariffs, given the complexity of oil supply chains and refinery operations.

The United States needs to import heavier grades of crude as the mainly light oil it currently produces would be unable to meet refinery needs, and would furthermore result in too much gasoline and not enough middle distillates such as diesel being produced.

While a challenge, perhaps the best tactic to follow in the current crude oil market is to focus on actual, real developments.

(The opinions expressed here are those of the author, a columnist for Reuters.)

Editing by Richard Pullin

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