The most ambitious oil production cuts in history will not keep global oil prices afloat in the coming months as the coronavirus continues to take its toll, according to investors.
Oil prices began to slide hours after the world’s biggest producers agreed to make record cuts to their output, prompted by fears that the plan to shore up the global market may not be enough.
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Despite plans from the Opec oil cartel and its allies to hold back about 10% of the world’s supplies, or nearly 10m barrels a day, the price of Brent crude retreated to just above $30 a barrel on Monday. It began 2020 at more than $65 per barrel.
The deal was backed by the US, Canada and Norway, countries which do not usually participate in Opec supply deals, offering hope that the cuts could deepen to about 20m barrels of oil a day.
Carbon emissions from fossil fuels could fall by 2.5bn tonnes in 2020
But industry experts fear the plan will not counter the debilitating effectthe coronavirus pandemic has had on global oil demand and leave the market oversupplied with crude for most of the year.
Goldman Sachs warned that the “historic but insufficient” deal would not go far enough to prevent supplies from overwhelming the world’s oil storage facilities and forcing producers to shut their wells.
The US bank said oil prices would fall further in the coming weeks because the voluntary production cuts brokered by Opec were “still too little and too late” to tackle a 19m barrel a day demand slump during April and May.
Market analysts at the French investment bank BNP Paribas said the deal may “at best” help to set a floor on the market’s sliding oil prices before a recovery was possible later this year.
Opec plans to keep a hold on oil production until April next year. This may help to buoy prices in the second half of the year as demand for oil to produce transport fuels begins to recover as coronavirus travel restrictions ease.
Morgan Stanley lifted its forecasts for oil prices for the second half of the year by $5 to between $30 and $35 a barrel, and Citi believes prices could climb to between $35 and $45 a barrel.
Brent crude climbed from 18-year lows of below $23 a barrel earlier this month to more than $36 a barrel last week, as talks between Saudi Arabia and Russia appeared to signal an end to a bitter price war that threatened to compound the impact of the pandemic on the oil market.
Riyadh and Moscow planned to pump record oil volumes this year to increase their market share before agreeing to lower production. Saudi Arabia appears to have changed tack by offering buyers discounted prices on oil deliveries next month to maintain a competitive edge while it adheres to the new deal.
The kingdom’s biggest discounts, of between $3 and $5.50 below the market price for Brent crude, will be offered to buyers in Asia, according to a statement from the state oil company Saudi Aramco.
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