Oil futures: Crude retreats as OPEC+ cuts fall short of balancing market

Crude futures fell into negative territory in early trading Sunday evening, as the market sized a historic global production cut agreement against demand outlooks that have been heavily impacted by COVID-19 pandemic containment efforts.

At 2223 GMT NYMEX May WTI was down 29 cents at $22.47 and ICE June Brent was 3 cents lower at $31.45/b.

OPEC and its allies locked in a historic oil supply accord Sunday after Saudi Arabia, under pressure from the US, agreed to give Mexico a looser production quota, ending a four-day stalemate that threatened to escalate a price war in the midst of the coronavirus crisis.

The deal would see the 23-country OPEC+ alliance rein in 9.7 million b/d of crude oil production for May and June -- down from the 10 million b/d originally envisaged late last week, as Mexico was allowed out from 300,000 b/d of its proposed cut commitment. Mexico will instead cut 100,000 b/d, and then reconsider its continued participation in the pact, according to sources involved in the talks.

The cuts are aimed at backstopping the market's slide as coronavirus containment measures continue to erode global oil demand and ending a punishing price war launched by Saudi Arabia and Russia.

But they may not be enough to stabilize the market in the short-term, with many analysts projecting an oversupply of 20 million b/d, or more, in the coming months and a dearth of oil storage capacity.

"Today isn't about balancing markets so much as preventing global oil stockpiles from overflowing," ClearView Energy Partners managing director Kevin Book said in a note.

Reports that producers had finalized the agreement, which had been in limbo much of the weekend, sent crude futures sharply higher at the start of trading, but futures quickly retreated from these highs as the market weighed the cuts against demand outlooks.

Front-month WTI opened 8% above its Thursday close while Brent was up around 6% at the start of trading Sunday.

"For energy markets to get excited, production cuts around 20 million b/d were needed, not the 9.7 million b/d plus another 5 million b/d from G20 countries," OANDA senior market analyst Edward Moya said.

Energy ministers of the G20 late Friday endorsed a framework OPEC+ production cut agreement, which at the time had yet to be finalized, but there were few details about which nations had committed to concrete output cuts and a communique from the meeting did not mention any specific actions.

Russian energy minister Alexander Novak said Friday that OPEC+ expects producers outside the group to cut another 5 million b/d of crude production in May and June, in an interview broadcast on the Russia 24 TV channel.

"No one will be surprise if this OPEC event becomes a 'buy the rumor, sell the news' event," Moya said. "Despite the skepticism that this production deal will not see a high-level of compliance, it should end calls for oil prices to fall to single digits."