Oil prices climb higher on hopes OPEC+ will approve supply cuts

Oil prices moved higher on Thursday in anticipation that OPEC+ will agree to supply cuts in a move that will support the market amid weakening demand due to the Covid-19 outbreak.

Brent crude is trading at $33.68 a barrel, up 2.5%, as of 15:20 (GMT) on Thursday. Meanwhile, the US West Texas Intermediate (WTI) is 2.7% higher at $25.77 a barrel.

OPEC+ meet to discuss supply cuts

OPEC+ will meet to discuss cutting oil production by about 10% of world supply, which equates to a reduction of around 10 million to 15 million barrels of oil per day (bpd) in a global effort to support the market amid the economic fallout from Covid-19.

Investors have grown optimistic about the prospect of supply cuts after reports surfaced that Russia was ready to reduce its output by 1.6 million bpd, with Algeria’s energy minister hopeful that the meeting will bear fruit. However, Russia has made it clear that it will only reduce supply if the US pledges to do the same.

If OPEC+ can agree to the supply cuts, it would represent the larges reduction in production ever signed off by the group of oil producers.

But even if OPEC+ can agree to a 15 million bpd cut in oil production, it is unlikely to be able to offset weakening demand, especially when forecasts predict a 23 million bpd supply overhang in April.

‘Even if a production-cut agreement is reached, which will surely give prices a short-term boost, we believe the enthusiasm will subside at some point and the reality of the size of the demand imbalance will eventually hit the market,’ Rystad Energy’s head of oil markets, Bjornar Tonhaugen, told Reuters ahead of the OPEC+ meeting.

Similar sentiments have been echoed by analysts, who contend that oil prices have fallen by 50% since the start of the year and global demand forecasts are down by 30%, raising eyebrows about the efficacy of OPEC+ supply cuts in support oil prices.

‘Ultimately, the size of the demand shock is simply too large for a coordinated supply cut,’ analysts from Goldman Sachs said in a note.

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