OPEC extending oil cuts positive, but risks undersupply

ANKARA

OPEC and its allies agreeing to extend oil production cuts by a further one month is positive for the market and prices, but it risks the possibility of an undersupply in the face of rising demand in third quarter of this year, according to experts.

Saudi Arabia-led OPEC and Russia-spearheaded non-OPEC agreed Saturday to extend oil production cuts until the end of July, which was set to expire on June 30.

The 23-nation group known as OPEC+ will continue to curb their total crude production by 9.7 million barrels per day (bpd) until July 31, while some member countries that failed to reach full conformity with their production cut quotas in May and June will have to accommodate their curbs in July, August and September.

OPEC+ deal is remarkable given that coronavirus-related weak global oil demand and oversupply pushed crude price in April to their lowest levels since 1999 with international benchmark Brent crude plummeting below $16 per barrel.

"Just six weeks ago, April ended with negative WTI prices and Brent was screaming for help," Norway-based Rystad Energy’s head of oil markets Bjornar Tonhaugen said.

"If anyone dared to predict where we would be standing today, with $40+ oil prices and generous cuts extended into July, he would be dismissed as a wishful thinker," he added.

Tonhaugen said the global oil market could not have wished for a better way out of the price collapse, and the recovery in crude prices has been faster than many have anticipated.

"Unless a second COVID-19 wave hits the world, [OPEC deal] will be the backbone of a quick recovery for the energy industry," he said.

"That is due to the oil stocks decrease that we will see as a result of the production deficit. Stocks are now what keep prices at relatively low levels and when the quicker they fall, the faster we will see prices rise," he added.

Risk of undersupply

However, there is a significant risk of crude supply lagging behind a potential increase in global oil demand if coronavirus-related quarantine measures are softened and overall oil consumption rises steadily around the world.

"Demand is continuing to recover, with our forecast for the third quarter of this year seeing global oil demand 10 million bpd higher than it was in the second quarter, showing the recovery from Covid-19 lockdowns," said Ann-Louise Hittle, vice president of macro oils at Wood Mackenzie.

Hittle noted that total crude supply around the world has already decreased in the second quarter of 2020 by an average 6 million bpd from the first quarter.

"This gives an indication of how quickly the fundamentals are changing -- and just as OPEC+ decides to extend a nearly 10 million bpd production cut for another month," she said.

"Bringing supply back to the market is a daunting yet delicate balancing act, and for the OPEC+ partners, getting the timing right is critical," she warned.

For OPEC+ countries, the initial objective is to support prices until supply and demand finds a balance in the post-coronavirus market environment.

Until then, OPEC's Joint Ministerial Monitoring Committee (JMMC) will continue to closely monitor the market conditions and member countries' oil output compliance and conformity levels .

JMMC will next meet on June 18 and it will convene monthly until December 2020. OPEC's next ordinary meeting will be held in Austrian capital Vienna on Nov. 30, while non-OPEC ministerial meeting will convene on Dec. 1.