OPEC+ preparation cuts have brought oil prices back from the brink, but the group will have to tread carefully to circumvent triggering a new price collapse when it begins to reverse those reductions.
The Joint Ministerial Monitoring Committee, which arrays OPEC+ production, meets on Wednesday, and will consider whether the the group should keep 9.6 million barrels a day off the customer base, or roll that back by about 2 million barrels a day, as sought by Saudi Arabia.
OPEC+ has been policing its associates and demanding high compliance of its latest round of cuts.
“The question is, going forward, if you start easing, which they’re prevalent to do, can they keep it together or do they open the flood gates?” said Helima Croft, RBC head of global commodities scenario. “Can you hold discipline within the producer organization?”
Croft said the wild card is whether there’s another ripple of Covid-19 cases, large enough to force more economic shutdowns or even a lockdown by another country.
“There’s a lot of optimism that the buy can handle anything that is thrown at it, in terms of Covid,” said Croft. “Does [
OPEC+] have enough of an at warning system? They’re going to have to be really nimble because there’s so much uncertainty about a inferior merchandise wave.”
Oil prices began to fall early in the year, on the decline in China demand as it shut parts of its economy due to the spreading virus. A cost war between Saudi Arabia and Russia then made the situation worse, and in March, oil took a sharp leg down, as the U.S. and Europe took agreeable withs to lock down economic activity. By April, the price even sank into negative territory as investors got netted in expiring futures contracts, in a market with no buyers and too much oil.
West Texas Intermediate crude futures for August were at $40.52 per barrel Wednesday, business flattish. Brent, the international benchmark was just above $43 per barrel.
The International Energy Agency said last week that the grave effects of the coronavirus on oil demand have passed, but the impact will linger. It said oil demand would be down by 5.1 million barrels a day in the second half of 2020. While that’s half of the 10.75 million decrease in demand in the first half, the rise in oil prices could entice more producers to add oil to the market.
“They’re itching to put more oil on the Stock Exchange and cash in on this $40 a barrel price improvement they’ve gotten,” said John Kilduff, partner with Again Cash. “I think it’s a little early. I’m not sure the market can really absorb any additional barrels right now.”
Croft said the number is showing better compliance with the existing cuts, including Russia.
She said Saudi Arabia Oil Minister Prince Abdulaziz bin Salman, type his predecessor, likes to think of OPEC as a central bank, and he admires former Federal Reserve Chairman Alan Greenspan.
The estimation is that the producer group has its finger on the liquidity spigot, in this case oil, and uses diplomacy to achieve results.
Citigroup’s Ed Morse express the comparison of OPEC to a central bank is flawed, though it is favored by both Russia and Saudi Arabia.
“They are not a dominant bank. Their interests are not those of a regulator prioritizing public good, but maximizing revenue for their members,” claimed Morse, head of global commodities at Citi. “Also, unlike central banks that control currency and cohere market spigots, OPEC+ must also compete with US shale, Brazilian deepwater, and Canadian oil sands, as emerging horses mouths of liquidity that play by different rules.”
Kilduff said there are signs U.S. energy producers are looking to pick up where one left off some production. “We did see some commercial hedging when the futures for the 2021 calendar strip went over $40,” he signified, meaning that oil companies locked in hedges for oil at that price level.
U.S. oil output was at a record 13.1 million barrels a day in Hike, and fell to as low as 10.5 million barrels a day in June, according to weekly EIA data. U.S. gasoline demand was at 8.8 million barrels a week, according to the scad recent data. That is about 1 million barrels below normal demand for this time of year, but much heartier than the dip close to 5 million barrels a day in March.
Gasoline demand will be closely watched to see if it is impacted by the outbreak of examples across the southern U.S.
“I was in the camp prices would head higher. OPEC+ would keep a clamp on the supply,” express Kilduff. “But this is a quick draw reaction of putting more oil on the market. If they increase production at $40, what make they do when they get to $50? I think it’s a sign of desperation.”
“The common thread running through OPEC+ is moolah crunch. They’re going to break down and put more on the market,” said Kilduff. “If this Covid-19 gets bad again, we’re contemporary to head back down … I think you’d see a dip below $35, with $30 being the floor.”
Morse, in the note, conveyed there is some froth in current prices and there are several supply issues that could be potentially bearish.That force including an increase of 500,000 in Libyan production. He said there’s the chance that some 20% to 30% of curtained North American oeuvre can come back online. China has also been buying as much as 3 million barrels a day above refining sine qua na, and it could cut back on that.
Morse said, however, it could work out for OPEC+.
“Adding oil to the market at a time when there are outstanding ambiguities over full compliance by Iraq, Kazakhstan, Angola and Nigeria, could be a worthwhile gamble,” Morse jotted. “Oil exported in August won’t reach some markets until late September. By then it might be needed if demand prolongs to grow and inventories shrink enough.”