OPEC+ agreed over the weekend to extend the cut in oil production until July 31. The oil cartel and its allies have decided to extend the 9.7 million barrel per day cut by one month, which is 100,000 barrels per day less than in June, and almost 10% of the global supply. Mexico has not signed up to the new agreement. The return of 2 million barrels of crude oil to the daily supply will be postponed until 31 July.
The aim of this extension is to allow oil prices to continue to recover, as demand increases and the excess oil stored is drained with the reactivation of economic activity at a global level. In addition, at the conference where the decision was adopted, it was determined that Iraq and Nigeria, which have so far failed to comply with the agreed production cuts, will carry out an additional reduction in July. This is in order to compensate for the levels not reached in the previous two months. For its part, Libya, which is outside the agreement due to the civil war there, would have resumed production following the upturn in demand resulting from the end of the lockdown. And with China having recorded monthly crude oil imports which have reached all-time highs after increasing by 19.2% year-on-year.
The cartel will now meet monthly to monitor compliance with the agreement and gauge the pulse of the market.
The price of crude oil continues its recovery, which has taken it above 43 USD/bd, implying a revaluation of over 150% from the April lows of 16 USD/bd. Today Brent is up 2% having already discounted on Friday the expectation of the agreement (up 6%).
For Bankinter’s analysis team, maintaining the cuts should partially compensate for the sharp decline in demand this year, estimated at 30%.
“Whatsmore, the idea of compensation introduced by the agreement eliminates a point of conflict which had become apparent last week”.
“The main fear is that other producers like the US will increase their market share to the detriment of OPEC, taking advantage of an improvement in demand. However, if that happens, the rise should not be too excessive, given that demand remains weak and oil companies have made tough cost cuts that may affect their drilling activity.”
However, Morgan’s analysts believe there are several reasons to think oil will continue to face downward pressure:
- With WTI at $41 US shale it is already “in the money” and if it goes higher we would enter a zone of production growth.
- The risk that the OPEC countries will not comply increases with the price of crude.
- The increase in Chinese imports is temporary.
- There is no economic incentive to keep the 2.5mb/d production closed.
- Demand still seems to be fragile.