The GERM Report

-IMF: The Great Depression got nuthin’ on the COVID collapse

-10 million bpd or 20 million bpd depends on how you do the math.

Questions over the details of what’s been described as a historic breakthrough for global oil producers left Brent crude oil prices in the red early Tuesday. US President Donald Trump said the math behind an arrangement to trim some 9.7 million barrels per day actually worked out to 20 million bpd. Meanwhile, while signaling its willingness to accept market-driven production declines, Saudi Arabia promptly turned around and offered its crude to Asian customers at a steep discount. The battle for market share will indeed continue and oil prices are reacting in kind.

Brent crude oil was down 1.3% as of 8 a.m. ET to trade at $31.34 per barrel, erasing gains in the previous session. The Monday rally was lackluster considering trading was idled on Good Friday and the breakthrough weekend meeting among parties to the OPEC+ arrangement and other producers.

Trump on Monday said the arrangement among global oil producers was more than double the actual figures released by OPEC during the weekend. Tacitly taking credit for a truce in the oil price war between Saudi Arabia and Russia, the US president said the cut is “20 million barrels a day, not the 10 million that is generally being reported.” Trump shocked the market in early April by spilling the beans on the coordinated cuts, and according to Reuters reporting, Saudi Arabia’s math indeed works out to be close to 20 million bpd when counting strategic reserve purchases.  Nevertheless, some observers are still scratching their head over the calculations.

“Yet to get to twenty, you have to use fancy math,” Phil Flynn at The Price Futures group in Chicago wrote. “Not only is the president counting on significant production cuts from  Non-OPEC countries like Mexico, Norway, Oman, to hit that level but natural production reductions from the drop in rig counts in the U.S.”

Outside of OPEC, the production declines are largely economic in nature. The US Energy Information Administration in its latest productivity report forecast that US shale oil production is expected to decline by around 194,000 bpd in April to 8.7 million bpd, the steepest drop on record. Another 183,000 bpd is expected to come off in May. Out of all the US shale basins, the Permian should account for about half of that decline. None of that is voluntary or coordinated, so applauding a contribution is tantamount to applauding a bad economy. Already, many of the majors are cutting investments in the Permian and there are no indications that revenue will flow back anytime soon. The lag effect on prices versus performance suggest storage levels, with or without strategic stockpiles, will continue to rise toward the rim. That may be on the mind of Texas regulators later today when they decide whether free-market principles are still worth their salt.

Elsewhere, Saudi Arabia may have agreed to trim production, though the cut is from already-historic heights. After consent and a chuckle, the kingdom turned around and offered oil to its customers at a steep discount. According to a survey from Bloomberg, some refiners felt that wasn’t even cheap enough. And not to be outdone by the likes of Russia and Saudi Arabia, Oman has signaled it cranked open the spigot last month to the tune of 1.78 million bpd, up nearly 13% from February. It’s easy to point to a historic production deal as a success with a stacked deck like this.

Deal or no deal, oil production will do little to prop up the global economy. The International Monetary Fund on Tuesday reported that the COVID-19 pandemic could cause the global economy to contract by 3%, “much worse than during the 2008-09 financial crisis.” Country-by-country and the picture looks even more grim. The US economy is expected to shrink by some 6% and the euro area by roughly 7.5%. China, meanwhile, is slowly turning the corner, gobbling up cheap crude oil by the barrel-full. The IMF sees contraction there too, but not to negative territory. And the bounce? That goes to China, with an estimated growth of 9.2% next year, rivaling the 4.7% gain expected for the United States. With the US in the midst of a presidential campaign, how that growth is managed by either side may have dramatic geopolitical consequences in the post-COVID world.