Oil drops 9% as oversupply concerns outweigh hopes for a global production cut

Oil pumping jacks, also known as "nodding donkeys", operate in an oilfield near Almetyevsk, Tatarstan, Russia, on Wednesday, March 11, 2020.
Andrey Rudakov | Bloomberg via Getty Images

Oil dropped on Tuesday as hopes that the world's biggest producers would agree to cut output were tempered by a worsening crude oil glut and the threat of a deeper-than-expected global recession.

West Texas Intermediate crude fell 9.39%, or $2.45, to settle at $23.63 per barrel, around the lows of the day. Brent crude fell 3.57% to settle at $31.87 per barrel. On Monday WTI dropped 8%, while Brent shed 3%. 

"The market is indicating that it wants some more certainty on whether the Russians and Saudis will strike a deal to limit supply," said Gene McGillian, vice president of market research at Tradition Energy in Stamford, Connecticut.

"You're also seeing pressure coming in from the fact that the market is expecting another week of sizable inventory gains here in the U.S.," he said.

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The top global suppliers of crude, including Saudi Arabia and Russia, plan to meet on Thursday to discuss reducing output, but several energy ministers have said they will do so only if the United States joins in with its own cuts, sources told Reuters.

On Tuesday, the U.S. Department of Energy, noting new monthly forecasts, pointed out that production is already dropping without government involvement.

Any final agreement on how much the Organization of the Petroleum Exporting Countries and its allies, known as OPEC+, will curb output would depend on volumes that producers such as the United States, Canada and Brazil are willing to cut, an OPEC source said on Tuesday.

Prices are likely to remain low due to a global recession that the latest survey of economists in a Reuters poll suggested will be more serious than was expected a few weeks ago.

OPEC+, which includes Russia, had been curtailing production in recent years even as U.S. producers ramped up their ouptut to make the country the world's biggest crude producer.

U.S. President Donald Trump on Monday said OPEC had not asked him to push domestic oil producers to cut production to buttress prices. He also said U.S. output was already declining in response to falling prices.

Coordinated action by U.S. oil producers would typically be a violation of antitrust laws.

Worldwide oil demand has dropped by as much as 30% this year, coinciding with moves by Saudi Arabia and Russia to flood markets with extra supply after a previous output deal fell apart.

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"With 28 million bpd of oversupply in the oil market in April and 21 million bpd in May, the global coordinated production cuts that are really needed may be too large for the producers to accept; perhaps twice as large as the numbers being discussed," said Rystad Energy's Bjornar Tonhaugen.

U.S. crude oil stockpiles were seen rising for the 11th straight week, a preliminary Reuters poll showed.

The poll comes ahead of reports from the American Petroleum Institute (API) on Tuesday, an industry group, and the Energy Information Administration (EIA), an agency of the U.S. Department of Energy, on Wednesday.