Baku, Azerbaijan, June 27
Trend:
Weakening oil prices build the case for an extension to 2019 production cuts, with prices at the same levels as when the first decision to implement cuts was taken in 2017, Trend reports with reference to Fitch Ratings report.
“As the July OPEC general meeting approaches, even with prices buoyed by escalating conflict in the Middle Eastern Gulf, we believe that OPEC+ will agree to extend production cuts for at least another six months to 2020. The lack of sustained price gains indicates that the cuts have been ineffective in their aims and that markets believe continued cuts will be necessary to maintain prices given the souring global economic growth story,” the report said.
OPEC’s commitment to a stable and balanced oil market began back in late November 2016. More than two years later OPEC combined with 10 other non-OPEC oil producing nations are by agreement holding nearly 1.8 million barrels a day off the market.
Faced with another decision to extend cuts into 2020, OPEC+ will meet in early July to discuss the impacts to global supply balances and the success of their strategy to hold barrels off the market.
OPEC+ is expected to remain broadly compliant with the deal, as export pipeline issues in Russia look to limit output into the summer. It will again fall to Saudi Arabia to quell dissension in the group, as prices would clearly fall if cuts were to be removed. However, limits to production have left most participants with flat production growth over the last two years, with those practicing non-compliance the only ones to see output g row.
“Undoubtedly the cuts have helped stabilize and support prices,” the statement said.
Recent tensions in the Middle East have boosted prices, but in the longer term pressure from rising US shale output raises the specter of both declining market share and sustained price weakness.
“The only scenario we see for production cuts to end successfully would be if prices topped $85 per barrel for six months at minimum. However, given the current market conditions this unlikely given the significant output growth US shale is expected to provide. Barring significant increases in demand coupled with a greatly improved economic growth story continued supply management will be needed to raises prices sustainably,” the report said.
“As present, continued supply management is arguably the only card OPEC+ has left to play. If growth in US shale output continues in line with growing but slowing demand there leaves little room for OPEC+ production increase without risking further oversupply."
"However, the longer the production cuts stay in place, the smaller members’ share of the global market becomes. The point at which OPEC will stop ceding market share may be tied to the overall revenue each member generates and the trade-off between production and prices. OPEC+ production cuts have partially averted the lower for longer scenario for now, but we see a new dynamic forming in which OPEC must learn to live with limited price upside and diminishing market share. If the cabal collapses and members produce at will, we could see prices revert back to their previous 2016 lows,” the statement said.