Page 6 - AfrOil Week 23

AfrOil COMMENTARY AfrOil

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

P6 www. NEWSBASE .com Week 23 10•June•2020