Futures Movers: Oil falls as OPEC recommends further output cuts, but doubts over Russia’s cooperation weigh

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Oil futures fell on Thursday as OPEC recommended that its members and allies cut production by an additional 1.5 million barrels a day to alleviate the hit to demand from the COVID-19 epidemic, but the market expressed doubts over cooperation from non-member Russia.

In a press release after a meeting in Vienna Thursday, the Organization of the Petroleum Exporting Countries Conference said it recommends that Friday’s meeting between OPEC and its allies, collectively known as OPEC+, extend the current production agreement to the end of the year. The deal to cut output by 1.7 million barrels a day, from an October 2018 baseline, was due to expire at the end of March.

OPEC also recommends a further output cut of 1.5 million barrels per day until the end of June, with OPEC’s share of that at 1 million barrels a day and non-OPEC members, primarily Russia, cutting 500,000 barrels per day.

“If Russia agrees to shoulder a third of the cuts, then the market will be balanced in Q2 and therefore [West Texas Intermediate crude] will stabilize in the low $50’s,” said Manish Raj, chief financial officer at Velandera Energy.

“If Russia does not join in, then we would expect OPEC to stick to its resolve, and refuse to make any additional cuts, leaving the market oversupplied,” he told MarketWatch. “In this scenario, oil will struggle to find a bottom and will slip significantly below current levels.”

“There is no middle ground whereby OPEC makes the cuts without Russian participation,” Raj said.

OPEC+ is expected to announce its final decision at its meeting Friday.

West Texas Intermediate crude for April delivery CLJ20, -0.21% on the New York Mercantile Exchange fell by 12 cents, or 0.3%, at $46.66 a barrel on the New York Mercantile Exchange, while May Brent crude BRNK20, -0.52%, the global benchmark, shed 48 cents, or 0.9%, to trade at $50.65 a barrel on ICE Futures Europe.

Oil was initially boosted by the news of the proposal then lost steam. Key OPEC ally Russia has yet to decide whether to go along with the move.

“This is a critical moment for OPEC + as a holdout tomorrow by the Russian’s could drive oil prices to their financial crisis lows” said Edward Moya, senior market analyst at Oanda, in a note. “The demand destruction that stemmed from the coronavirus will be a bigger shock than what happened in 2007-2008, so any failure from OPEC + could warrant another massive selloff with crude prices.”

The Wall Street Journal reported (paywall) that Russia agreed in principle to reduce production but hadn’t approved a production figure.

OPEC’s recommendation for the 1.5 million barrel per day cut was “a bullish surprise versus expectations on the surface however, Russia was not willing to participate in the [600,000 barrel-per-day] cut recommended last month, so it remains unlikely that they will be interested in taking the brunt of the non-OPEC portion of the cut,” which total 500,000 barrel per day, said Tyler Richey, co-editor of Sevens Report Research.

In other energy trading April gasoline RBJ20, +0.22% rose by 0.1% to $1.5571 a gallon, while April heating oil HOJ20, -0.39% shed 0.5% to $1.5263 a gallon.

April natural gas NGJ20, -1.42% fell 1.7% to $1.795 per million British thermal units following data showing a decline in U.S. supplies of the fuel that was a bit more than the market expected.

The U.S. Energy Information Administration reported Thursday that domestic supplies of natural gas fell by 109 billion cubic feet for the week ended Feb. 28. Analysts polled by S&P Global Platts forecast a decline of 105 billion cubic feet.

“Near-term weather continues to skew firmly in favor of the bears with estimates for the next two weeks showing warmer than normal conditions across virtually the entire US,” said Robbie Fraser, senior commodity analyst at Schneider Electric, in a note. “With time running out, the US is likely to finish the winter heating demand season with one of the most consistently mild stretches in recent memory, hammering an already bearish gas market.”

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