Oil Market Recovering As OPEC+ Decides To Extend Deep Cuts Into July

The oil market, which has suffered one of the harshest blows this spring in light of the COVID-19 pandemic, is showing signs of recovery and is expected to stabilize even more as the OPEC+ alliance has decided to extend deep oil output cuts to July, experts told Sputnik

MOSCOW (UrduPoint News / Sputnik - 11th June, 2020) The oil market, which has suffered one of the harshest blows this spring in light of the COVID-19 pandemic, is showing signs of recovery and is expected to stabilize even more as the OPEC+ alliance has decided to extend deep oil output cuts to July, experts told Sputnik.

Oil prices plummeted earlier this year against the background of the COVID-19 pandemic, the lockdown measures and the economic slowdown. In April, West Texas Intermediate May futures prices even went negative. In an effort to bring stability to the market, OPEC+ countries, as well as oil producers from a wider G20 group of nations such as the US, Brazil and Canada, reached what many have called a historic agreement in April. The deal envisages a reduction in oil production by the OPEC+ group by 9.7 million barrels per day for two months starting on May 1, and possibly up to 15 million barrels per day with the G20 nations taken into account.

OPEC+ was initially slated to ease production cuts to 7.7 million bpd starting from July. However, at the alliance's meeting on Saturday, the countries decided to extend the May-June quotas to July as well.

SITUATION IMPROVING AS LOCKDOWN MEASURES EASED WORLDWIDE

The oil prices have showed an unexpected 'robustness' in the past weeks as the global community is gradually lifting lockdown measures, Werner Antweiler, a professor with the Sauder school of Business at the University of British Columbia (UBC), told Sputnik.

"The oil market has shown surprising robustness during the last weeks as prices have inched upwards despite storage reservoirs nearing their maximum capacity. Similar to the rally in the stock market, oil prices have recovered faster than many expected (myself included) and reached nearly $40/bbl. More important, though, is the flattening of the forward curve. The oil market is no longer in contango, with the future price of crude oil one year from now less than 5 percent above the spot price," Antweiler said.

The resumption of economic activities in China, India, and the United States are one of the factors driving the oil demand up, Mamdouh G Salameh, an international oil economist, told Sputnik.

"The global oil demand is accelerating with the world's three biggest crude oil consumers, namely China, the United States and India already approaching pre-coronavirus oil demand levels. These three countries account for 40 percent of global oil demand. My calculations suggest that global oil demand could reach 98.30 mbd in 2020 compared with 101.34 mbd in 2019, just 3 mbd less despite the horrendous destruction of global oil demand by the coronavirus outbreak," Salameh, who serves as a visiting professor of energy economics at the London-based ESCP Europe Business School, said.

The glut in the oil market may "deplete quite fast" with oil prices expected to rebound to $45-$50 a barrel during the second half of 2020 and even reach $60 in early 2021, according to the oil economist.

Antweiler agrees with Salameh that oil prices will not exceed $50 per barrel for the remainder of 2020, however expects the demand to be slightly lower.

"The OPEC+ cuts have helped stabilize the market, but demand remains weak even as economies are reopening. Discretionary driving will remain depressed throughout the summer, and business activity across a number of industrial sectors will suffer from slowdown as a result of pandemic. Demand seems to have rebounded to 94-95 mbd worldwide, but there is not much upward potential left at this point. What has buoyed markets in recent weeks was also a surge in oil imports from China," the UBC professor underlined.

SOME OPEC+ MEMBERS CONTINUE TO DEVIATE FROM QUOTAS

Even though the measures undertaken by the OPEC+ have indeed proved effective in keeping the oil prices afloat, the alliance has been troubled by the non-compliance of some members, particularly Nigeria and Iraq. Both countries have admitted themselves that they did not manage to fully comply with the quotas in May in June, but have vowed to contribute more cuts in the following months.

"As with most OPEC+ agreements, there is significant risk of deviation from agreed terms. Iraq has one of the worst compliance rates (520,000 bpd over quota in May), and overproduction was also reported for Nigera (120,000 bpd, Angola (130,000 bpd) ... The lack of compliance has been the weak spot of all recent OPEC+ agreements�it is simply too tempting economically to deviate and grab market share from other suppliers. The extension of production cuts by an extra month is a success for Saudi Arabia and Russia," Antweiler said.

Even though both Iraq and Nigeria have been citing economic difficulties as the reason for their undercompliance, that is not a valid excuse when all OPEC+ members are currently suffering from economic setbacks, Salameh noted.

"Both Iraq and Nigeria as well as Kazakhstan are claiming economic difficulties. But then all members of OPEC+ are facing economic difficulties and most of them are still fulfilling their obligations under the OPEC+ deal. Still, the rise in crude oil prices above $42 a barrel signals that the global economy and global oil demand are headed in the right direction and this makes it easier for OPEC+ to swallow Iraq's and Nigeria's cut deficits," the oil economist said.

Despite a consistent track of non-compliance by some signatories of the oil cut deal, Saudi Arabia and Russia, as the leaders of the alliance, are unlikely "to let the production cut deal derail because of a few "laggards," Salameh concluded.