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Crude Oil Weakens; Demand Slips Amid Oversupply

By Peter Nurse    

Investing.com - Oil markets traded lower Friday, as market participants continue to fret about the powerful combination of deepening demand destruction and massive oversupply.

AT 9:45 AM ET (1345 GMT), U.S. crude futures traded 4.1% lower at $21.66 a barrel, while the international benchmark Brent contract fell 6% to $24.77.

The drop in prices this month is putting increasing pressure on U.S. shale production, Pioneer Natural Resources (NYSE:PXD) Chief Executive Scott Sheffield said earlier, bemoaning the resistance of other U.S. companies to a deal on output restraint.

"We’ve had opposition from Exxon (NYSE:XOM)," Sheffield told CNBC. "They prefer all the independents to go bankrupt and then pick up the scraps. We have other companies like Marathon and Ovintiv who are opposed to it because they are so financially stressed that they cannot cut production or else they go bankrupt."

Marathon, one of the biggest U.S. producers outside of the supermajor bracket, narrowly avoided having its debt downgraded to junk by Moody's this week. As such, it still remains eligible for the Federal Reserve's new backstop facility for investment-grade rated corporate debt.

The issue about oversupply in crude markets came to the fore earlier this month after a pact between the Organization of the Petroleum Exporting Countries and other producers, known as OPEC+, to curb oil production to support prices fell apart, caused by a spat between Russia and Saudi Arabia.

There have been few signs of a thaw developing since, but Kirill Dmitriev, head of Russia's sovereign wealth fund, said Friday a new OPEC+ deal to balance oil markets might be possible if other countries join in.

"We are in contact with Saudi Arabia and a number of other countries. Based on these contacts we see that if the number of OPEC+ members will increase and other countries will join there is a possibility of a joint agreement to balance oil markets," Dmitriev, head of the Russian Direct Investment Fund (RDIF), told Reuters in a phone interview.

Dmitriev and the Energy Minister Alexander Novak were Russia's top negotiators in the original production cut deal with OPEC.

The Saudis have since denied contact between the energy ministers of the two countries. 

Even with some restraint on output, “the world is still set to see a significant oil surplus over 2Q20, given the demand hit we are currently seeing,” said ING, in a research note.  “This suggests that any potential action would likely only stabilize prices, rather than push the market significantly higher.”

Global oil demand could drop as much as 20 million barrels per day because of the coronavirus outbreak, the head of the International Energy Agency said Thursday.

Evidence of the demand hit can be seen by the fact that Saudi Arabia is struggling to find customers for its extra oil, Reuters reported, citing industry sources.

Oil companies were seeking to cut April allocations of Saudi crude by as much as 25%, the report added.

The low price of crude threatens to make some inland crude in central U.S., Canada, Russia and China trapped, i.e. not profitable to transport to market. Bloomberg reported that Wyoming sweet crude had traded for as little as $1.75 a barrel recently.

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