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OPEC conformity not going to last very much longer

Commentary Materials 22 June 2020 13:54 (UTC +04:00)
OPEC conformity not going to last very much longer

BAKU, Azerbaijan, June 22

By Leman Zeynalova – Trend:

The OPEC conformity is not going to last very much longer, Cyril Widdershoven, a Middle East geopolitical specialist and energy analyst, a partner at Dutch risk consultancy VEROCY and Global Head Strategy Risk at Berry Commodities told Trend.

The 19th Joint Ministerial Monitoring Committee (JMMC) took note of the overall conformity of 87 percent for the month of May 2020. It also observed individual country conformity levels and reiterated the critical importance that all Participating Countries achieve their 100 percent level, and make up for any monthly shortfalls in the months of July, August and September.

‘The level is conformity, looking at history of OPEC, is reasonably high. However, these figures are not representing the fact that the overwhelming majority of production cuts is still being done by the two main producers, Saudi Arabia and UAE, while the rest is trying to conform to the deal or are even outright refusing to put it in place. When looking at the current global market, the situation is still very dire. Even that oil prices have gone up significantly, the underlying market fundamentals are not there to support it,” said the expert.

Widdershoven pointed out that as always prices are hiding reality, now driven by emotions or profit taking, while the oil production glut still exists, demand is still very low, economic crisis is increasing, and will really hit most probably after summer in Europe.

“Unemployment is going up, manufacturing is down, so no real optimism in reality to see a change to the positive. Extra demand is not driven at present by demand to produce or use, but mainly due to still existing low price settings, so refineries and countries are buying to take advantage of low prices, not to cope with expected increase in demand from industry or consumers, the latter two are not showing any real options yet,” he said.

The expert noted that most OPEC producers are looking at higher government deficits, higher debts and rising unrest.

“The need to get additional financial support is needed, and for most of them this is to produce more oil and hope that somebody will take it. This is a major threat for end 2020, if demand is still low or lower than expected, prices will crash again. The market understands that countries such as Iraq, Venezuela, Iran or Libya are not able and willing to conform. They all will do their utmost to cheat the system or indicate that they will become a good member of OPEC at a much later time,” said Widdershoven.

He went on to add that OPEC’s production cuts are Saudi-UAE, supported by some others such as Kuwait, Oman and Nigeria.

“The rest is only for media purposes. The latter also is in place for non-OPEC, where Russia and FSU, Mexico and Brazil promise but hide behind the fact that this is easy to be done due to low demand for their volumes. US shale is also out of market, not due to compliance or voluntary production cuts but due to lack of customers. If prices increase to around $40 per barrel they all will be back in business,” the expert concluded.

Following the 11th OPEC and non-OPEC Ministerial Meeting held June 6, all Participating Countries:

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, and endorsed the ‘Statement on the Declaration of Cooperation.

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Follow the author on Twitter:@Lyaman_Zeyn

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