Page 5 - FSUOGM Week 28 2020

FSUOGM COMMENTARY FSUOGM
OPEC+ to meet on July 15 to discuss cuts
The consensus is that Russia, Saudi Arabia and other members of the alliance will ease cuts in August
RUSSIA
WHAT:
OPEC+'s energy ministers are meeting on July 15.
WHY:
The group will discuss their cuts policy after this month.
WHAT NEXT:
OPEC+'s easing of cuts could derail the market's recovery.
OPEC+’S committee of energy ministers will meet on July 15 to decide whether to keep 9.6mn barrels per day of supply o ine or ease restrictions by around 2mn bpd at the end of this month.
e consensus is that Russia, Saudi Arabia and other members of the producers’ alliance will agree to taper the cuts in August. But there is a risk that doing so could derail the oil market’s recovery.
“ e question is, going forward, if you start easing, which they’re going to do, can they keep ittogetherordotheyopenthe oodgates,”RBC analyst Helima Croft said in a research note. “Can you hold discipline within the producer organisation?”
OPEC+ has been putting pressure on its members to stick to their quotas. Kazakhstan had some di culty but is now nearing compli- ance. Iraq is by far the worst o ender, pumping 4.2mn bpd of oil in May – almost 600,000 bpd above its cap. It managed to cut supply to 3.7mn bpd last month, but this is still 100,000 bpd above quota.
Once cuts are eased, OPEC+ may have more di culty policing members.
If OPEC+ does decide to bring back more supply, another wave of coronavirus (COVID- 19) cases could cause demand to slump once again, and the group may not be able to react in time.
“ ere’s a lot of optimism that the market can handle anything that is thrown at it, in terms of COVID,” Cro said. “Does [OPEC+] have enough of an early warning system? They’re going to have to be really nimble, because there’s so much uncertainty about a second wave.”
e recovery of Brent and West Texas Inter- mediate (WTI) has been checked by growing expectations in recent weeks that OPEC+ will reduce its cuts. The current plan is to keep 7.7mn bpd of oil o the market until the end of this year and then ease restrictions even further.
Prices have also taken a hit from a return to movement restrictions in some US states, in response to fresh COVID-19 outbreaks.
“In simple words, the world is about to increase oil production, but demand is now
projected to recover at a slower pace,” Rystad Energy analyst Louise Dickson said on July 14. “Where will extra oil go now if people are ordered back to their homes to reduce spread? If transport is again restricted? It was road fuel demand that ticked up and moved the market in the rst place.”
OPEC, for its part, struck a positive note on July 14 regarding the market’s outlook.
“The gradual reopening of the economies and societies around the world has provided a much-needed resurgence in demand,” while production cuts “have helped reverse a rapidly rising trend in inventories,” OPEC”s secretary general Mohammad Barkindo said this week. “ ese supply and demand trends are helping bring us step by step closer to achieving a bal- anced market.”
ere is only so much sacri ce that OPEC+ members will be willing to make to support the market. As oil prices grow, so too will the group’s concerns that other producers, like the US, will begin capitalising on its e orts.
Russia produced 9.32mn bpd of oil and con- densate in June, down from 9.39mn bpd in May and near its OPEC+ target, according to energy ministry data. But the country consistently failed to stick to its quotas last year under the previ- ous OPEC+ deal, and could stray from the new agreement. ose that called for Russia to aban- don the last cuts in March could speak up again now that the industry has been brought back from the brink. ™
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