Oil slumped as investors saw OPEC+ supply-curb proposal as insufficient to offset estimates for demand destruction from the COVID-19 outbreak.

Oil futures sank more than 9 per cent in New York after earlier jumping nearly 13 per cent. The producer group, which includes Saudi Arabia and Russia, is set to cut 10 million barrels a day of its oil output for two months. That compares with estimates for demand loss of as much as 35 million barrels a day. OPEC+ also plans to seek an additional cut of 5 million barrels a day from Group of 20 countries, which will meet Friday.

Saudi Arabia and Russia both agreed to cut output to about 8.5 million barrels a day in May and June, according to delegates. Saudi Arabia was pumping about 9.7 million barrels a day in February and has since massively increased its production in the last six weeks.

The decision at the OPEC+ virtual gathering will form the basis of Friday’s discussions on further contributions from G-20 nations, with U.S. involvement seen as key. The Kremlin has insisted that America must do more than just let market forces reduce its own record production. U.S. President Donald Trump, meanwhile, has said his country’s cut will happen “automatically” as low prices put the shale patch in dire straits.

Major producers are scrambling for a deal as energy consumption has plummeted and hammered prices. Oil demand in India has collapsed by as much as 70 per cent and some American refineries face closure as consumption fell to the lowest in at least three decades. Producers will need to agree on a deep and prolonged supply cut, or risk crude falling back again.

Prices:

• West Texas Intermediate for May delivery fell US$2.33 to settle at US$22.76 a barrel in New York
• Brent for June settlement was down 97 cents at US$31.87 a barrel at 2:45 p.m.

While the anticipation of a production agreement has pushed prices slightly higher, WTI crude is still down more than 55 per cent this year. That is giving India an opportunity to bolster its strategic reserves, while South Korea has said it will expand its storage this year.

Still, demand destruction in the U.S. is a significant concern for investors who are worried that the worst is yet to come. Local consumption of petroleum products fell last week to the lowest level in decades, according to weekly Energy Information Administration data.

The monthly rollover by the biggest oil ETF and index funds put additional pressure on the front of the WTI market, which has already been hit by concern that storage tanks in the U.S. will soon fill up. May’s discount to June traded at the widest level since 2009 during the session, and settled at US$6.06 a barrel.

That said, recent gains in the futures market aren’t influencing physical oil prices in the Americas. Key crudes in North America such as Western Canadian Select have been trading at single digit levels on an outright basis since late March. These grades are landlocked, and likely to be harder hit unlike those with more access to export markets. Global demand has also been stymied by processing cuts at refineries.

OPEC and its allies, and the G-20, face a huge task in trying to drain the large oversupply. But there are signs that the market is banking on improved balances down the line. Volatility for the second half of 2020 has fallen sharply in recent days, indicating that the market has faith in OPEC+ restoring price stability, brokerage Marex Spectron wrote in a report.