Culled—Proshare
June 8, 2020
by CSL Research
During the weekend, OPEC and its allies reached a decision to extend their historic oil-production cut of 9.7mb/d initially scheduled for May and June only to July. It was also resolved that countries such as Nigeria, Kazakhstan and Iraq, which exceeded production quotas in May and June should compensate with extra cuts from July to September. This comes after OPEC+ noted that overall compliance with the May deal was 89%.
We recall that on 12 April, OPEC+ reached a landmark deal to rescue the oil market from a collapse following the steep decline in oil prices caused by the global pandemic which dampened global oil demand alongside a price war between Saudi Arabia and Russia. The agreement was scheduled for implementation in three phases on a reducing basis; 9.7mb/d oil production cut for May and June 2020, 7.7mb/d production cut from July to December 2020, and then 5.8mb/d reduction over the subsequent 16 months ending April 2022. We think the decision of OPEC+ to extend the 9.7mb/d cut to the end of July compared with 7.7mb/d agreed earlier reflects their concerns about recovery in global demand for oil, despite the recent rally in crude prices. Since hitting a two-decade low of US$19.33 on 21 April, Brent crude prices have doubled. Prior to the OPEC+ meeting on saturday, Brent crude gained c.6%, crossing the $40 mark for the first time since 6 March.
We expect OPEC+ production cuts and the gradual easing of lockdown measures as countries begin to reopen their economies to remain positive for oil prices in the short term. However, we think the gradual release of inventories stored during the periods of weak oil prices and the soft recovery in global demand will limit the upside in oil prices. While we see some respite for oil prices in the short term, we remain cautious in expressing a medium term optimistic view as there is a significant risk of repeat outbreaks and lockdowns. Coming home, we expect oil earnings to remain under pressure, due to the additional cut the country is expected to take as a result of the partial compliance in May.
