Vladimir Zernov
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Crude Oil

Oil Video 02.07.20.


Saudi Arabia Increases Pressure On Laggards

In June, OPEC production fell to multi-decade lows as Saudi Arabia led the effort to cut production and achieve better supply/demand balance.

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However, Iraq, Nigeria and Angola failed to cut production in line with their quotas. According to Wall Street Journal, Saudi Arabia has threatened to start a price war against these countries if they do not fullfill their promises and cut oil production in line with the OPEC+ deal.

At this point, this report did not put any pressure on oil prices as oil continues its attempts to settle above the $40 level after the release of better-than-expected inventory report.

In my opinion, the risks of a true price war are low. Saudi Arabia has enough weight to put significant pressure on laggards and force them into agreed production cuts.

Most likely, Angola, Nigeria and Iraq will have no choice but to follow the deal as Saudi Arabia could easily reach out to their customers and offer them oil at a lower price.

Oil Stuck At Sea Finds Its Way Back Into The Market

According to a recent Reuters report, the volume of oil stored at sea tankers has started to decrease as demand improved and oil prices increased.

Importantly, the spread between the front-month contract and the longer-dated contracts has significantly narrowed. Currently, the spread between WTI August 2020 contract and the December 2020 contract is just 60 cents.

For Brent oil, the spread is almost non-existent. Previously, such a spread was very significant as the market was worried about near-term oil storage capacity but anticipated that the situation will get better closer to the end of the year.

Now, such fears are gone, and the decisive production cuts from OPEC+ together with natural production cuts from U.S. producers have materially improved the market situation.

Since storing oil at sea comes at a cost, it makes little sense to wait for the end of the year while making payments to tanker owners if the spread between the front-month contract and the longer-dated contracts is small.

In the near-term, excessive oil from tankers may put some pressure on the oil market but working through this oil is very important to achieve better oil prices in the future.

For a look at all of today’s economic events, check out our economic calendar.

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