BAKU, Azerbaijan, June 2
By Leman Zeynalova – Trend:
Extension of OPEC+ cut could tip the market into deficit, Trend reports citing Fitch Solutions.
“Compliance with the OPEC+ production cut deal has outpaced our expectations, while demand appears to have passed its nadir. Continued production restraint by OPEC+, steep declines in non-OPEC supply and rising oil demand will support further price strength over H220 and 2021. However, bloated crude and product inventories, the unwinding of the cut deal and the long road to economic recovery will somewhat cap the upside,” said the company.
On April 12, the group committed to reduce its production by 9.7mn b/d in May and June.
“All indications point to a high level of headline compliance in May, with further reductions expected in June. As with previous cuts, compliance at the individual market level has varied greatly, with Iraq and Nigeria falling far short of their commitments. In contrast, Russia – which has a similarly patch record of compliance – has surprised us by delivering on the bulk of its agreed cut. Compliance by Saudi Arabia, the UAE and Kuwait has been characteristically strong and the three have pledged to curb their supplies by an additional 1.2mn b/d in June. This, combined with rising compliance among other OPEC members, will further tighten the market over the coming weeks,” Fitch Solutions said in its report.
Currently, the group plans to reduce its cut from 9.7mn b/d to 7.7mn b/d, effective July 1.
“However, there are plans to bring forward the next OPEC+ meeting to June 4, with a view to extending the cuts at their current levels into the second half of the year. There are clear signs that the physical market is already tightening rapidly and an extension of the cut, against a backdrop of rising demand, could tip the market into deficit, triggering a drawdown of global crude inventories and further price strength,” reads the report.
An extension would also buoy Brent via sentiment channels, signalling continued cohesion between Russian and Saudi oil policy, according to Fitch Solutions.
“We maintain our reservations as to the durability of the deal over the long term. The most fundamental barrier to continued cooperation is that Saudi Arabia’s fiscal breakeven oil price is far higher than that of Russia. At present, it is strongly in Moscow’s interest to comply with the deal, but as prices rise we expect compliance will fray,” said the company.
Fitch Solutions believes that Libya, Iran and Venezuela – all of which are exempted from the cut – remain wildcards.
“The combination of renewed conflict in Libya and US secondary sanctions on Iran has removed around 3.0mn b/d of supply from the market. US sanctions have also deepened the production losses in Venezuela, although it is hard to disentangle the impact of these sanctions from the long-term, structural declines in play there.”
In 2020, production in all three markets is likely to remain heavily subdued, according to Fitch Solutions.
“Political realities in Caracas and Tehran make any rollback of sanctions measures all but impossible in the near term. In Libya, there has been limited progress made towards a lasting peace deal and the conflict has reescalated. It is our analysts’ view that no international backer will commit themselves sufficiently to tip the balance and force a resolution and, as such, they expect that LNA commander Khalifa Haftar will maintain his blockade of the oil export facilities over the coming months. However, over the medium term, we expect the bulk of Iranian and Libyan oil, alongside more limited volumes of Venezuelan oil, will be returned to market, which will help to limit the upside in oil prices,” reads the report.
Fitch Solutions has revised up its forecast for Brent crude. “We now expect an average of USD40.0/bbl in 2020, rising to USD49.0/ bbl in 2021, compared to USD33.0/bbl and USD42.0/bbl previously.”
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