On April 12th the Organisation of the Petroleum Exporting Countries (OPEC) and its allies agreed to cut 9.7m barrels a day from the market in May and June, a record and equivalent to about 10% of global supply. However, even assuming that members of the alliance stick to the deal, which history suggests they may not, demand is already plunging further. The International Energy Agency expects demand may sink by 29m barrels a day this month.
Not every oil producer faces so acutely a problem. The international benchmark, Brent crude, which is produced in the North Sea and can more easily be placed in tankers, has fallen steeply, but not as far as WTI (see chart). Indeed tanker rates have soared as producers and traders seek to fill ships with crude. Spot charter rates for crude tankers in early April topped $200,000 a day, according to Morgan Stanley, compared with about $40,000 a day last year. Such rates reflect some traders’ bet that they can wait out the price slump at sea.
In the meantime, many shale companies will feel the pain, despite the best efforts of Donald Trump. America’s president helped broker the OPEC deal and insisted last week that the industry would recover “far faster” than anticipated. Mr. Trump is now reportedly weighing a plan to pay frackers to keep their oil below ground. That idea may win him support in Texas and North Dakota, but Congress is unlikely to approve it. The legislature already rejected an earlier proposal to buy American crude for the country’s strategic petroleum reserve.
More companies may keep their oil below ground, whether Mr. Trump pays them or not. Since the crisis began Canada, Iraq and Venezuela have accounted for the majority of production shut-ins, according to Rystad Energy, a data firm and consultancy. Producers often continue to operate at a loss rather than halt output, as it can be costly to restart operations and a shut reservoir may be damaged permanently. Shale operators have been loth to accept that fate. Soon they may have no choice.