Page 7 - FSUOGM Week 23

FSUOGM COMMENTARY FSUOGM

of war, sanctions and Islamist insurgency, that
is a tall order. The government risks a backlash
from parliamentarians and rival political parties
by acceding to foreign pressure and foregoing
crucial oil sales.
While Iraqi Finance Minister and Acting Oil
Minister Ali Allawi did pledge to improve com-
pliance with pledged cuts in an unusual Twitter
post last Tuesday, he didn’t go any further. As
Saturday’s meeting got underway, Assem Jihad,
Iraq’s Ministry of Oil spokesperson, said in a
statement that “despite the economic and finan-
cial circumstances that Iraq is facing, the country
remains committed to the agreement.”
Three other nations – Angola, Kazakh-
stan and Nigeria – also produced above their
OPEC+ quotas in May. The three had already
agreed to bring their production in line with the the global economy,” he said.
agreement. One ongoing issue for OPEC+ has been
The final deal in April set out historic cuts of nations not abiding by their prescribed quotas,
9.7mn bpd, or roughly 10% of global oil supplies, and Saturday’s agreement is contingent upon
to offset the unprecedented collapse in demand greater levels of compliance. Nations that have
caused by the virus lockdowns. Then a few weeks failed to curb output by their allocated amount
later, Saudi Arabia and its closest allies in the Per- must enact additional cuts in July, August and
sian Gulf promised additional supply restraint of September in order to make up for non-compli-
1.2mn bpd in June. It was not immediately clear ance in May and June.
whether these extra voluntary cuts would extend “Today’s deal is a positive development and,
beyond June, as they are not part of the deal. unless a second COVID-19 wave hits the world,
After the massive oversupply earlier this year, it will be the backbone of a quick recovery for
Russian Energy Minister Alexander Novak pre- the energy industry,” said Bjornar Tonhaugen,
dicts there could be a supply deficit of 3-5mn bpd Rystad Energy’s head of oil markets. “That is due
next month, Interfax reported. That is roughly in to the oil stocks’ decrease that we will see as a
line with projections from an OPEC committee result of the production deficit. Stocks are now
that met on Wednesday, a delegate said. what keep prices at relatively low levels and the
That would provide a stronger foundation for quicker they fall, the faster we will see prices rise.”
the crude price recovery, and also allow the cartel The cuts would then begin to taper. From July
to start chipping away at the billion-barrel stock- until the end of 2020, 7.7mn bpd would be taken
pile that has built up during the crisis. offline, followed by 5.8mn bpd from January
“Saudi Arabia is taking a zero tolerance 2021.
approach to cheating, but it’s unclear how they While the final OPEC+ statement said that
can get Iraq to actually comply with the deal,” all participants support the accord, it later tran-
said Mohammad Darwazah from consultancy spired that Mexico will not cut its production for
Medley Global Advisors. another month. While the lone dissenter said it
would stick to the original agreement, its reluc-
Price bounce tance to cap its crude production was one of the
So far, the production curbs have been effec- main stumbling blocks in finalising the long-an-
tive. The price of crude rallied by almost 90% ticipated oil deal back in April.
last month, a record gain, as shrinking supplies “Mexico’s position was clear from the begin-
helped to offset pandemic-related demand ning, in April. It came as no surprise to anybody
losses. that they are not willing to reduce production in
Ahead of the meeting, the oil market dis- July,” Iran’s OPEC governor Amir Hossein Zam-
played optimism over an agreement. On Fri- aninia said after Saturday’s meeting.
day West Texas Intermediate (WTI) jumped Mexico’s defection from the pact means it will
5.72% to settle at $33.56, while international be able to resume its efforts to boost output in
benchmark Brent crude gained 5.78% to settle at line with President Andres Manuel Lopez Obra-
$42.30. It was each contract’s sixth straight week dor’s promises. Mexico’s contribution is just
of gains, and the highest price since March 6. 100,000 bpd, with another 250,000 compensated
“Today we have grounds to be cautiously for by the US.
optimistic about the future, but we are not out The rise of US oil production could also be
of the woods yet and challenges ahead remain a headache for the oil market, which has just
to be seen,” Saudi Arabia’s Energy Minister started to rebalance. According S&P Global
Prince Abdulaziz said in opening remarks as the Platts, the oil prices rally has already prompted
OPEC+ meeting began. He urged the group to several US shale operators to scale back their
display unity and come to a swift decision. production curtailment plans.
“Together we are stronger, together we can The next few weeks are sure to be
restore stability to oil markets and help rebuild interesting.™

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