BAKU, Azerbaijan, April 24
By Leman Zeynalova - Trend:
Even assuming full compliance, the action by OPEC+ will be insufficient to balance the market in Q2, Trend reports referring to Fitch Solutions Country Risk and Industry Research.
“We expect a generally strong level of compliance with the deal, led by Saudi Arabia, Kuwait and the UAE, where we forecast cuts broadly in line with committed levels. For most producers, current market conditions will bring severe fiscal and economic pressures to bear and it is in their own self-interest to keep the current deal intact. The largest risk stems from Russia and Iraq. Both are slated to contribute large shares to the overall cut, at 2.5mn b/d and 1.0mn b/d respectively. Neither has committed to action on this scale previously and both have a patchy record of compliance. Poor compliance by these two producers alone would drag the cut sharply lower,” said the company in its report.
“Taken together, it is unlikely that we see cuts substantially in excess of 10.0mn b/d accrue over the next two months, including both action by OPEC+ and strategic inventory builds and organic declines elsewhere. Even under the most optimistic of scenarios, this will be far from sufficient to bring the market into balance and we expect to see a continued rise in global inventories and renewed downward pressure on Brent over May and June,” Fitch Solutions said.
The company believes that the OPEC+ cut will alleviate the most extreme of the physical and financial pressures facing the market, but there remains a residual risks that global logistics chains become overwhelmed or that effective storage capacity in some markets is breached.
“Storage capacity in the US is already being tested and, given the current pace of inventory build, tank tops at Cushing - the delivery point for WTI - will be breached by early May. The lack of storage availability drove the contract for May delivery down as low as -USD40.0/bbl during intraday trading, while the June contract is currently at around USD11.5/ bbl. Extreme price weakness and logistical bottlenecking are forcing well shut-ins, while a sharp drop in investment will rapidly bleed through into accelerated production declines. As a waterborne crude, Brent is less exposed to the type of infrastructural constraints faced by WTI. Nevertheless, given the weakness in demand, there is material risk that effective storage capacity comes under strain in June, which would likely drive Brent towards single-digit lows,” reads the report.
While the effectiveness of the OPEC+ agreement may be questioned over the short run, it is significantly the outlook on prices for H220 and 2021, reads the report.
“The combination of a recovery in global oil demand and market management by the group points to a stronger and more stable price environment over the medium term. That said, the volume of supply being held out of the market by OPEC+ and a large overhang of storage barrels will necessarily cap any upside in the price. The deal may also pose downside risk to prices, should it unravel before 2022. In March, Russia refused to extend a 300,000b/d cut by more than three months; in April, it has locked into a 1.5mn b/d cut for 24 months. While the cut deal is currently expedient for Russia, we question whether it is in Moscow's interests to maintain compliance once demand begins to normalize post Covid-19. As such, we believe there is significant risk that the deal breaks down next year,” the company said.
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