Page 6 - LatAmOil Week 23 2020

LatAmOil COMMENTARY LatAmOil

Failure to reach an agreement this month could cartel to start chipping away at the billion-barrel
have brought millions of barrels of oil onto the stockpile that has built up during the crisis.
market, undermining a tentative recovery as the “Saudi Arabia is taking a zero tolerance
coronavirus (COVID-19) lockdown eases. approach to cheating, but it’s unclear how they
With US shale production starting to come can get Iraq to actually comply with the deal,”
back online, OPEC’s careful management of said Mohammad Darwazah from consultancy
the demand recovery is crucial. Saudi Arabia Medley Global Advisors.
and the Kremlin, who were on opposite sides of
a vicious price war until a peace deal in April, Price bounce
are now united against those in OPEC who have So far, the production curbs have been effec-
consistently failed to shoulder their share of the tive. The price of crude rallied by almost 90%
burden. Russia, a habitual laggard, has complied last month, a record gain, as shrinking supplies
punctiliously with the historic deal brokered by helped to offset pandemic-related demand
President Donald Trump in April, and wants to losses. Ahead of the meeting, the oil market dis-
make sure others are doing so too. played optimism over an agreement. On Friday
Saudi Arabia, OPEC’s de facto leader, and West Texas Intermediate (WTI) jumped 5.72%
Russia have to perform a balancing act of push- to settle at $33.56, while international bench-
ing up oil prices to meet their budget needs mark Brent crude gained 5.78% to settle at
whilst not driving them much above $50 a $42.30. It was each contract’s sixth straight week
barrel, which would encourage a resurgence of of gains, and the highest price since March 6.
shale production from their US rival. “Today we have grounds to be cautiously
optimistic about the future, but we are not out
Compliance of the woods yet and challenges ahead remain
The details of the deal between OPEC+ and to be seen,” Saudi Arabia’s Energy Minister
Iraq on compliance were not yet clear. Tougher Prince Abdulaziz said in opening remarks as
conditions will be difficult for Iraq to accept. It the OPEC+ meeting began.
made less than half of its assigned cutbacks last He also urged the group to display unity
month, so compensating fully would require it and come to a swift decision. “Together we are
to slash production by a further 24% to about stronger, together we can restore stability to oil
3.28mn barrels per day (bpd). For a country markets and help rebuild the global economy,”
still rebuilding its economy following decades he said.
of war, sanctions and Islamist insurgency, that One ongoing issue for OPEC+ has been
is a tall order. The government risks a backlash nations not abiding by their prescribed quotas,
from parliamentarians and rival political parties and Saturday’s agreement is contingent upon
by acceding to foreign pressure and foregoing greater levels of compliance. Nations that have
crucial oil sales. failed to curb output by their allocated amount
While Iraqi Finance Minister and Acting Oil must enact additional cuts in July, August and
Minister Ali Allawi did pledge to improve com- September in order to make up for non-com-
pliance with pledged cuts in an unusual Twit- pliance in May and June. The cuts would then
ter post last Tuesday, he didn’t go any further. begin to taper. From July until the end of 2020,
As Saturday’s meeting got underway, Assem 7.7mn bpd would be taken offline, followed by
Jihad, Iraq’s Ministry of Oil spokesperson, said 5.8mn bpd from January 2021.
in a statement that “despite the economic and While the final OPEC+ statement said that
financial circumstances that Iraq is facing, the all participants support the accord, it later tran-
country remains committed to the agreement.” spired that Mexico will not cut its production for
Three other nations – Angola, Kazakh- another month. While the lone dissenter said it
stan and Nigeria – also produced above their would stick to the original agreement, its reluc-
OPEC+ quotas in May. The three had already tance to cap its crude production was one of the
agreed to bring their production in line with the main stumbling blocks in finalising the long-an-
agreement. ticipated oil deal back in April.
The final deal in April set out historic cuts of “Mexico’s position was clear from the begin-
9.7mn bpd, roughly 10% of global oil supplies, ning, in April. It came as no surprise to anybody
to offset the unprecedented collapse in demand that they are not willing to reduce production in
caused by the virus. Then a few weeks later, July,” Iran’s OPEC governor Amir Hossein Zam-
Saudi Arabia and its closest allies in the Persian aninia said after Saturday’s meeting.
Gulf promised additional supply restraint of Mexico’s defection from the pact means it
1.2mn bpd in June. It was not immediately clear will be able to resume its efforts to boost out-
whether these extra cuts would extend beyond put in line with President Andres Manuel Lopez
June, as they are not part of the deal. Obrador’s promises. Mexico’s contribution is
After the massive oversupply earlier this year, just 100,000 bpd, with another 250,000 com-
Russian Energy Minister Alexander Novak pre- pensated for by the US.
dicts there could be a supply deficit of 3-5mn The rise of American oil production could
bpd next month, Interfax reported. That is also be a headache for the oil market, which
roughly in line with projections from an OPEC has just started to rebalance. According to S&P
committee that met on Wednesday, a delegate Global Platts, the oil prices rally has already
said. That would provide a stronger foundation prompted several US shale operators to scale
for the crude price recovery, and also allow the back their production curtailment plans. ™

P6 www. NEWSBASE .com Week 23 11•June•2020