U.S. optimistic on supply cut deal as oil prices sag

The Trump administration defended its efforts to lead world oil markets out of crisis Wednesday, even as the International Energy Agency warned the major production cut deal that President Trump helped to broker won’t fully offset plummeting global prices and demand.

Assistant Secretary of State for Energy Resources Frank Fannon said the president’s personal diplomacy in recent days was critical to the “historic” deal between Russia, Saudi Arabia and other major oil players to cut production by a record levels in response to collapsed demand from the COVID-19 pandemic.

U.S. drilling companies and fracking firms had been badly hurt by a price war between Riyadh and Moscow this year. Mr. Fannon said President Trump’s threat of tariffs on foreign oil suppliers remains “on the table,” but will most likely not be needed.

Benchmark U.S. crude touched its lowest price since 2002 before recovering slightly to $19.87 a barrel on Wednesday, down 24 cents from a day earlier. Brent crude, used to measure global prices, fell $1.91, or 6.5%, to $27.69 a barrel.

Briefing reporters Wednesday on the deal among so-called OPEC+ producers, Mr. Fannon expressed optimism that the cut, which is set to take roughly 10 million barrels — and perhaps more — taken off of the global market per day by May 1, will stave off an all-out market collapse with global prices soft and heading down.

“We went through a rocky period of uncertainty in global oil markets over the past few weeks, but this latest deal provides an ability to restore a sense of calm,” he said.

But markets and analysts still need to be convinced, as the announcement of the deal has done little to turn around oil prices in the face of a massive supply glut.

The market outlook was soured further by the new IEA assessment early in the day that no output cut by producers will fully offset ongoing market falls projected for the rest of April.

The IEA monthly oil market report estimated that global demand will be down 29 million barrels a day throughout April, falling to a level not seen since the mid-1990s. It also suggested a negative impact on pricing caused by the plummet is likely only to be worsened by a glut of oil that had built up on the global market amid the price wars of recent months.

The report praised the push for a global production cut, but said it just won’t be enough

“The historic decisions taken by OPEC+ and the [Group of 20 nations] should help bring the oil industry back from the brink of an even more serious situation than it currently faces,” the IEA said. “Even so, the implied stock build-up of 12 million barrels per day in the first half of the year still threatens to overwhelm the logistics of the oil industry — ships, pipelines and storage tanks — in the coming weeks.”

A separate analysis published online Wednesday by Council on Foreign Relations fellow Amy Myers Jaffe warned that so-called “emerging-market petrostates” could face the most pain in the days ahead.

While a sustained price drop may help the Trump administration in its efforts to pressure oil-dependent countries such as Venezuela and Iran, the impact could also be disastrous for more friendly governments in countries such as Ecuador, Brazil, Nigeria and Iraq.

Those nations are likely to find themselves unable to pay back basic development loans from foreign lenders, including China and the International Monetary Fund.

The analysis in the journal Foreign Affairs noted that Iraq had been planning to use oil revenues to cover almost 95 percent of its $100 billion-plus national budget, a budget based on a projection that the global price of oil would stay above $56 per barrel.

The price on Wednesday was below $20 a barrel.

Still, Mr. Fannon expressed hope that the coming production cuts, which last through the end of 2021, will start to be felt.

“I think that there’s going to be a latency in terms of the supply build-up and how that works its way out,” he said. “The market reactions on any one day, I can’t speak to that.. The system just has to work it’s way through.”

Mr. Fannon said that America’s emergence over the past year as a net energy exporter for the first time in 70 years has elevated Washington’s overall influence over other global oil market players. “The outcome of the last several weeks led by the president, really is a huge victory for diplomacy,” he said. “Our energy strength in the United States has certainly increased our ability to weigh in and affect the global energy international mechanisms to support the reduction of volatility.”