Output cut may not sustain oil price

A historic pact by key producers to cut global output by a tenth couldn’t lift oil prices on Monday on concerns the move lacked the necessary firepower to reverse the impact of an estimated 30 per cent demand decline caused by the Covid-19 pandemic.

Lower prices can help revive the Indian economy, although motorists have barely benefited from it recently, partly due to the lockdown that has kept most of them off the roads and partly due to the reluctance of the government and oil companies to pass on the benefits to consumers.

Crude oil traded around $31 a barrel on Monday, about 2 per cent lower. Twenty-four countries, led by Saudi Arabia and Russia, commonly referred to as Opec+, agreed on Sunday to cut output by 9.7 million barrels per day, or about 10 per cent, for May-June and by lower amounts until April 2022.

The deal was brokered by US President Donald Trump after a combination of the pandemic and Saudi-Russia rivalry sent prices to the lowest in about two decades, threatening to bankrupt several shale producers in the US. Analysts say an estimated 30 per cent drop in global oil demand, much bigger than the 10 per cent cut pledged by producers, and an already large inventory build-up will not permit oil prices to rise. Prices have already risen about $9 a barrel this month in anticipation of the supply cut deal and a further rise can come only if countries start easing the lockdown, spurring demand.

Output cut by producers in the US, Canada or other producing countries that are not part of the producers’ cartel may also help prices over the next few weeks.

ET Energy World
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