Page 5 - MEOG Week 29

MEOG Commentary MEOG

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 a second entire month of July. Meanwhile, Iraq will have
coronavirus (COVID-19) outbreak escalates, less flexibility to increase output until October,
resulting in travel restrictions being re-imposed having agreed to compensatory production cuts
in multiple countries and causing fuel demand for July, August and September, following its his-
to plummet once again. On the supply side, toric non-compliance.”
OPEC+’s commitment to the cuts could falter. Meanwhile, the Omani Ministry of Oil said
Many of the oil cartel’s members are facing acute that Muscat would show its “100% commitment
economic crises, following the steep fall in oil to the OPEC+ alliance by cutting 161,000 bpd, as
revenues. Some may become unable or unwill- of September 2020, from Oman’s quota.”
ing to continue 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 anticipated 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 co-ordinating production increases COVID-19 lockdown measures.
going forward.” The world’s oil production was 86.86mn bpd
Saudi Arabia, for instance, needs $70 per bar- in June, a nine-year low and down 2.39mn bpd
rel oil to fund its budget, whereas Russia needs a versus the level in May. This decline was mainly
price of only $42 per barrel to balance the books. on the back of OPEC+ cutbacks. Full-year out-
And while Saudi Arabia made a voluntary cut of put is forecast by the IEA to be 7.1mn bpd lower
1mn bpd in June to help prices recover, Russia 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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