Oil Mixed On Doubts About Extension Of Current Production Cuts

Oil Video 04.06.20.

Leading OPEC+ Members Push For Full Compliance

Oil is under some pressure today as the OPEC+ meeting will not be held on June 4. According to Reuters, the meeting may still take place this week in case the countries which have not complied with their quotas agree to cut production according to the original deal.

Previously, I wrote that production cuts were unlikely to be extended for more than two months but recent reports indicated that Russia and Saudi Arabia reached consensus about the extension of current production cuts for one month.

The main problem is that this extension is conditional upon full compliance from countries like Iraq and Nigeria. In addition, it looks like leading OPEC+ members want laggards to make up for their excessive production.

It is hard to imagine that Iraq or Nigeria will deliver additional production cuts at the time when the coronavirus crisis puts heavy pressure on their finances. Thus, the market may start to doubt whether OPEC+ will be able to negotiate any extension of the current production cuts.

The original OPEC+ deal implied production cuts of 9.7 million barrels per day (bpd) in May – June, followed by cuts of 7.7 million bpd starting from July. In case the current production cuts are not extended, the world oil supply will increase by 2 million bpd in July.

Russia Believes That The Oil Market Will Be In Deficit In July

According to Russian Energy Minister Alexander Novak, the global oil market could face a deficit of 3 million – 5 million bpd in July. The 2 million bpd spread between estimates is the difference between the extension of current production cuts and the implementation of the original OPEC+ deal.

As Russia believes that the oil market will be in deficit in any scenario, oil traders should not expect that it will be eager to extend current production cuts for more than a month or two.

Such a move would provide too much support for oil prices and allow U.S. shale oil companies to hedge their production at higher levels. This scenario would lead to increased U.S. oil production in the future, something that both Saudi Arabia and Russia clearly want to avoid.

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