Page 5 - FSUOGM Week 29

FSUOGM COMMENTARY FSUOGM

direction, with oil prices registering moder- said: “Bouncing back from the output cuts is
ate gains,” Rystad Energy analyst Paola Rod- likely to be swift for Middle Eastern producers.
riguez-Masiu commented on July 15. “But the Saudi Arabia made changes to rig schedules,
price recovery is fragile and hinges not only with the Berri and Marjan crude increment pro-
upon avoiding a derailing of the demand recov- jects slowed and units mobilised elsewhere. In
ery, but also OPEC+ adherence to quotas as they the UAE, Abu Dhabi National Oil Co. (ADNOC)
slowly ramp up output in August.” shut down Bab for maintenance for nearly the
On the demand side, the risk is that second entire month of July. Meanwhile, Iraq will have
coronavirus (COVID-19) escalates, resulting in less flexibility to increase output until October,
travel restrictions being re-imposed in multiple having agreed to compensatory production cuts
countries and causing fuel demand to plummet for July, August and September, following its his-
once again. On the supply side, OPEC+’s com- toric non-compliance.”
mitment to the cuts could falter. Many of the oil Meanwhile, the Omani Ministry of Oil said
cartel’s members are facing acute economic cri- that Muscat would show its “100% commitment
ses, following the steep fall in oil revenues. Some to the OPEC+ alliance by cutting 161,000 bpd, as
may become unable or unwilling to continue of September 2020, from Oman’s quota.”
restricting supply. Of Oman, the IGM Energy note added that
“The market is transitioning from a sub- “challenging geology and reliance on enhanced
stantial oversupply in H1 2020 to a deficit in H2 oil recovery (EOR) hinder output increases.
2020,” Fitch Ratings said in a report this week. The sultanate cut production by nearly a quar-
“OPEC+ faces the challenge of balancing the ter earlier this year, with most of this coming
need to achieve higher oil prices through pro- from Petroleum Development Oman’s (PDO)
duction cuts by its participants and a risk of los- large Block 6 concession. Compliance should
ing its market share to US shale, where the level not be an issue for Oman, but overcoming the
of investment activity will continue to be closely economic ramifications of lower oil prices and
correlated with prices.” returning to full output will be much more
BCS Global Markets believes oil “has run too challenging.”
far, too fast from April lows and a temporary Global oil demand is expected to be 7.9mn
price correction is overdue.” bpd lower this year than last, according to the
“At $40 per barrel, oil enters the region where International Energy Agency (IEA)’s latest
US shale producers could begin to raise their monthly report. It will rise by 5.3mn bpd in 2021
drilling activity,” the investment bank said last and exceed the 2019 level in 2022. This forecast
week. “Remember that not all OPEC+ members follows a 16.4mn bpd year-on-year decline in oil
have the same price target, a potential stumbling consumption in the second quarter, because of
point in coordinating production increases COVID-19 lockdown measures.
going forward.” The world’s oil production came to 86.86mn
Saudi Arabia, for instance, needs $70 per bar- bpd in June, a nine-year low and down 2.39mn
rel oil to fund its budget, whereas Russia needs a bpd versus the level in May. This decline was
price of only $42 per barrel to balance the books. mainly on the back of OPEC+ cutbacks. Full-
And while Saudi Arabia made a voluntary cut of year output is forecast by the IEA to be 7.1mn
1mn bpd in June to help prices recover, Russia bpd lower in 2020 than in 2019.
wants to avoid keeping back any more supply “While the oil market has undoubtedly
than it has to. It has plans to drill but not com- made progress since ‘Black April’, the large,
plete thousands of wells, allowing Russian pro- and in some countries, accelerating number of
ducers to quickly ramp up supply as OPEC+ COVID-19 cases is a disturbing reminder that
restrictions are eased and claw back market share the pandemic is not under control and the risk
from competitors. to our market outlook is almost certainly to the
In a note on July 20, consultancy IGM Energy downside,” the IEA said. ™

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