Page 13 - DMEA Week 29 2020

DMEA POLICY DMEA

OPEC+ agrees to eased cuts in August

GLOBAL RUSSIA, Saudi Arabia and the rest of the OPEC+ said in a video conference after meeting with
alliance of oil producers agreed on July 15 to ease his OPEC+ counterparts. “Economies around
record supply cuts from August, returning 2mn the world are opening up, although this is a cau-
barrels per day (bpd) to the market. They said the tious and gradual process. The recovery signs are
move was justified given the recovery in global unmistakeable.”
fuel demand from historic lows at the height of “The oil market is heading in the right direc-
the COVID-19 pandemic. tion, with oil prices registering moderate gains,”
Benchmarks were more or less unchanged Rystad Energy analyst Paola Rodriguez-Masiu
following the announcement, which was widely commented on July 15. “But the price recovery
anticipated. Brent closed at just above $43 per is fragile and hinges not only upon avoiding
barrel on July 17, around the same level as a week a derailing of the demand recovery, but also
earlier, while West Texas Intermediate (WTI) OPEC+ adherence to quotas as they slowly ramp
ended at just above $40.5 per barrel. News of oil up output in August.”
supply coming back on stream next month was On the demand side, the risk is that second
offset by data released by the US Energy Infor- coronavirus (COVID-19) escalates, resulting in
mation Administration (EIA), which showed travel restrictions being re-imposed in multiple
that US crude inventories had dropped 7.5mn countries and causing fuel demand to plummet
barrels in the week that ended July 10 – a greater once again. On the supply side, OPEC+’s com-
decline that was expected and indicating robust mitment to the cuts could falter. Many of the oil
growth in fuel demand. cartel’s members are facing acute economic cri-
OPEC+ will keep oil production at 7.7mn ses, following the steep fall in oil revenues. Some
bpd below the agreed baseline from August 1 may become unable or unwilling to continue
until the end of the year, versus 9.7mn bpd below restricting supply.
during May, June and July. Under the current “The market is transitioning from a sub-
plan, cuts will be tapered further to 5.8mn bpd stantial oversupply in H1 2020 to a deficit in H2
between January 2021 and April 2022. 2020,” Fitch Ratings said in a report this week.
Compliance with OPEC+ quotas has also “OPEC+ faces the challenge of balancing the
improved. Members that initially struggled to need to achieve higher oil prices through pro-
meet their quotas under the agreement have duction cuts by its participants and a risk of los-
cleaned up their act. Iraq has been the worst ing its market share to US shale, where the level
offender, producing 600,000 bpd more than it of investment activity will continue to be closely
should have done in May. But it closed the gap correlated with prices.”
to 100,000 bpd in June and has agreed to deeper BCS Global Markets believes oil “has run too
cuts between July and September to compensate far, too fast from April lows and a temporary
for past failings. price correction is overdue.”
“As we move to the next phase of the agree- “At $40 per barrel, oil enters the region where
ment, the extra supply resulting from the sched- US shale producers could begin to raise their
uled easing of production cuts will be consumed drilling activity,” the investment bank said last
as demand continues on its recovery path,” Saudi week. “Remember that not all OPEC+ members
Energy Minister Prince Abdulaziz bin Salman have the same price target, a potential stumbling

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