On Apr 9, OPEC and allies agreed to a tentative deal to cut oil production by 10 million barrels per day (which equals to a tenth of the global production per day) in May and June, the deepest cut ever agreed by global oil producers.
Mexico initially did not conform to OPEC’s plans as it meant 400,000-bpd output cut for the country. However, the country offered to cut production by 100,000 bpd. The deal also marks the end of the row between Saudi Arabia and Russia. The war had caused WTI and Brent to drop more than 50% in March, which turned out to be their worst month on record.
Despite the latest output cut, the price of Brent crude fell nearly 2.5% on Apr 10. WTI crude ETF United States Oil Fund (NYSE:USO) LP USO lost 7.7% and United States Brent Oil Fund, LP BNO shed about 4.5% on Apr 9 (read: Will Oil Continue Riding the Trump Mojo? ETFs in Focus).
Coronavirus Causes Trouble for Oil Patch
Global oil fuel demand has nosedived as much as 30% or 30 million bdp owing to the coronavirus outbreak that caused economic disruptions. This clearly points to the lower-than-needed-output cut (which is 10%) decided by the OPEC+.
Notably, steps to fight the disease have wreaked havoc on airlines companies. Widespread lockdowns have reduced vehicle usage to the bare minimum and disturbed economic activity substantially.
“The market has been underwhelmed by the proposed 10m/bd production cut, perhaps because of early expectations of a massive 20m/bd reduction,” according to Helima Croft, RBC’s global head of commodities research, as quoted on CNBC.
Meanwhile, global oil storage facilities are running out. So, oil producers won’t be able to reserve the commodity long enough to wait for price recovery. Analysts from Goldman Sachs (NYSE:GS) are forecasting that the coronavirus crisis will reduce oil demand by 19 million bpd in April and May, as quoted on Guardian.com.
The United States “will use the SPR [Strategic Petroleum Reserve] to store as much oil as possible." "This will take surplus oil off the market at a time when commercial storage is filling up and the market is oversupplied,” per U.S. Energy Secretary Dan Brouillette, quoted on spglobal.
Having said all, we would like to note that the Fed recently indicated that it would buy high-yield corporate bonds. This could restore sentiments about the struggling energy companies and the related ETFs to some extent. After all, most energy ETFs offer solid yields.
ETFs in Focus
Energy Select Sector SPDR Fund XLE lost only 0.9% on Apr 9owing to the Fed move. Notably, XLE yields about 12.05% annually. SPDR Bloomberg Barclays (LON:BARC) High Yield Bond ETF JNK, which has about 10% exposure to Corporate – Energy, gained about 6.7% on the day (see all High-Yield/Junk Bond ETFs here).
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Energy Select Sector SPDR ETF (NYSE:XLE): ETF Research Reports
SPDR Bloomberg Barclays High Yield Bond ETF (JNK): ETF Research Reports
United States Oil ETF (USO): ETF Research Reports
United States Brent Oil ETF (BNO): ETF Research Reports
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