Will record oil cuts be enough to counter demand collapse?

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Record Oil Output Cuts Likely Insufficient to Counter Demand Collapse

Despite historic reductions in oil production, the market faces a significant challenge in balancing supply with a dramatically collapsed demand, with storage facilities nearing capacity and key global players not participating in the cuts. The agreement by Opec and its allies to slash output by 9.7 million barrels per day (bpd) in May and June, a reduction of nearly 10% of global supply and more than four times the previous record, still falls short of addressing the anticipated 30 million bpd drop in demand for April.
Insufficient Cuts Amidst Unprecedented Demand Drop

The agreed-upon production cuts, while record-breaking, are overshadowed by the sheer magnitude of the demand collapse driven by the coronavirus pandemic. Forecasters, including Goldman Sachs, anticipate a demand drop of nearly 30 million bpd in April alone. This imbalance means that even with the substantial Opec+ reduction, inventory build-up is expected to continue, albeit at a slower pace, as storage tanks and vessels worldwide are rapidly filling.
Lack of Broader Global Participation

A significant shortcoming of the agreement is the absence of firm commitments from major oil-consuming nations, such as the United States and other G20 members, to reduce their own supply. While G20 nations were urged to contribute to alleviating the supply glut, the outcomes of discussions among their energy ministers and Saudi Arabia remain largely undisclosed. This lack of broader participation limits the overall effectiveness of the Opec+ cuts in restoring market balance.
Regional Production Dynamics and Inventory Concerns

While the headline figure points to a 9.7 million bpd cut, Middle Eastern producers like Saudi Arabia, the UAE, and Kuwait are expected to implement reductions exceeding the agreed 23% to compensate for their earlier production increases during a price war that preceded the Opec+ deal. Goldman Sachs estimates that the headline deal represents a 12.4 million bpd cut from claimed April Opec+ production, but only a 7.2 million bpd cut from average first-quarter 2020 production levels. A veteran oil trader highlighted inventory data as a critical factor, noting that while the pace of build-up may slow, it will persist.
China's Unique Position and Market Constraints

China, the world's largest oil importer, presents a unique situation as its refiners are set to increase crude oil throughput by 10% in April compared to March, reflecting its faster recovery from the pandemic. However, for China to balance its domestic market, it needs to export refined products. Such exports will likely be constrained because the current global issue is demand-led, not supply-led, meaning there are fewer buyers for these products on the international market. Furthermore, major countries' strategic petroleum reserves are largely full, with only China potentially having some remaining capacity, limiting another avenue for absorbing excess supply.

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Will record oil cuts be enough to counter demand collapse?

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