BAKU, Azerbaijan, June 8
By Leman Zeynalova – Trend:
Sub-compliant OPEC+ members will fail to compensate for not meeting cut levels, according to Rystad Energy.
Head of Oil Markets Bjornar Tonhaugen noted that the deepest voluntary production cuts in history got extended to July, and supply deficits are almost certain, which will cause sticks to decrease, Trend reports.
“The stocks relief will largely have an OPEC+ signature on it. The deal was not only a breath for the market, but a whole new room full of oxygen. Of course, as we have already stated, it is doubtful that sub-compliant members will manage to compensate for not meeting the cut levels so far and how effective a monitoring mechanism will be remains to be seen,” said the expert.
The company believes that countries such as Iraq and Nigeria will struggle to compensate fully, we believe, which will put strains on the coherence of the alliance during the second half of the year. “But again, rather sub-compliant at 9.7 million bpd than sub-compliant at a lower level.”
“We have updated our supply forecasts where we lowered our OPEC+ oil supply estimates for July by 2.9 million bpd and another 1.5 million bpd for August. These extra OPEC cuts increasingly tighten the crude and condensate balances. Stock draws of around 4 million bpd are now estimated for July and August,” said the analyst.
Furthermore, Tonhaugen believes OPEC+ is attempting to create a mini-bull-cycle by quickly tightening the prompt market, spur large stock draws and flip the oil curve into backwardation to incentivize even further stock draws.
“Saudi Aramco also utilized tighter market conditions by raising its monthly official selling prices (OSPs) for July by the largest amount ($5-7 to Asia) in at least 20 years yesterday. Overall, as long as the demand recovery in both products and crude remains intact, OPEC+ deeper cuts will ensure a solid foundation for oil prices into the summer months. We see fundamental support for current Brent prices due to the expected draws in the market, but be aware that US supply can again surprise to the upside,” said the expert.
It’s still all about the demand recovery, and OPEC+ must be cautious not to become too greedy with respect to crude price increases and hurt refinery economics too quickly, since the recovery in products demand and prices at the end of the day will call the shots in this recovery, according to Rystad Energy.
“Nevertheless, OPEC+ has taken a tighter grip on the near-term crude oil fundamentals with Saturday’s extension decision. Something to keep your eyes open for: The OPEC+ communique made it clear that Saudi-Russian patience with sub-complying countries is running out and time will only tell how long Riyadh and Moscow are willing to continue shouldering their heavy burdens if other member countries fail to compensate.”
During the 179th Meeting of the Conference of the Organization of the Petroleum Exporting Countries (OPEC) held on June 6 all member countries agreed to the five key elements in reaching their unanimous decision. They:
Reconfirmed the existing arrangements under the April agreement
Subscribed to the concept of compensation by those countries who were unable to reach full conformity (100 per cent) in May and June, with a willingness to accommodate it in July, August and September, in addition to their already agreed production adjustment for such months.
Agreed the option of extending the first phase of the production adjustments pertaining in May and June by one further month.
Recognized that the continuity of the current agreement is contingent on them fulfilling elements 1 and 2 above.
Agreed without dissent that the full and timely implementation of the agreement remains inviolable, based on the five key elements.
The meeting therefore agreed unanimously to extend the first phase of the production adjustment agreed at the 10th (Extraordinary) OPEC and non-OPEC Ministerial Meeting for a further month, to now run from 1 May 2020 to 31 July 2020.
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