By Alex Lawler
Oil rose towards $27 a barrel on Friday as Opec and its allies began a record output cut to tackle a supply glut weighing on the market due to the coronavirus crisis.
The global oil benchmark, Brent crude, has sunk by almost 60 percent in 2020 and reached a 21-year low last month as the coronavirus pandemic squeezed demand and Opeec and other producers pumped at will before reaching a new supply cut deal which began on Friday.
Brent for July rose 37 cents, or 1.4%, to $26.85 by 1205 GMT. U.S. crude for June added 83 cents, or 4.4%, to $19.67. Both benchmarks rallied sharply on Thursday. Brent rose 12% and U.S. crude gained 25%.
Output cuts of 9.7 million barrels per day by the Organization of Petroleum Exporting Countries, Russia and other producers, known as OPEC+, began on Friday. Even so, there are doubts the reduction, the largest ever agreed, will be enough.
“The production cuts are finally kicking in,” said Craig Erlam, analyst at brokerage OANDA. “Prices are still extremely low though and the next two weeks will likely see extreme volatility return.”
Demand is unlikely to recover rapidly, analysts said, offsetting producer efforts and these may in any case not be enough to bolster the market.
“The demand recovery will be a muted affair,” said Stephen Brennock of oil broker PVM. “What is more, OPEC+ curbs which take effect today will be no panacea for the hefty supply imbalance.”
A Reuters survey on Thursday showed that in advance of the new output cut, OPEC sharply raised output to the highest since March 2019, adding to excess supply on the market.
And underlining the difficulties some producers will face in meeting their commitments, Iraq will struggle to meet its quota of cutting output by nearly a quarter, industry sources said. Iraq is OPEC’s second-largest producer.
Also supporting prices, the U.S. Energy Information Administration said that crude inventories rose by 9 million barrels last week, less than the 10.6 million-barrel rise analysts had forecast.
“This is a second straight week of inventory and product demand figures suggesting a bottoming of the U.S. market,” said Stephen Innes, chief market strategist at AxiCorp.