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Vladimir Zernov
Crude Oil

Oil Video 19.06.20.

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OPEC+ Is Set To Increase Compliance With Oil Production Cuts

Yesterday, I wrote that OPEC+ technical meeting was focused on compliance by those countries who previously failed to bring their oil production in line with their agreed quota.

Today, oil got additional support from reports that lagging countries promised to better comply with their quotas. If this happens, oil supply will decrease further in July.

Active trading has already shifted to the August 2020 contact, whose spread with the December 2020 contract is roughly 30 cents. Previously, longer-dated contracts traded at a material premium to front-month contracts since traders believed that the supply/demand situation would improve by the end of the year.

Now, the pricing of the front-month contract fully reflects the improvements delivered by recent oil production cuts so this spread is gone.

Oil’s move above $40 could lead to an influx of speculative money into oil and oil-related equities so the upcoming trading sessions will be very interesting.

It remains to be seen whether the market will have worries about a potential surge in U.S. shale oil production as the prices have crossed the $40 mark. For now, such worries will likely take a back seat as traders are focused on economic recovery.

Russia Thinks That One Month Of Additional Production Cuts Will Be Sufficient Enough To Stabilize The Market

In a recent interview to the Russian business newspaper RBC, the head of Russia’s sovereign wealth fund Kirill Dmitriev stated that he did not see reasons to extend current production cuts for more than one month.

According to Dmitriev, economies have started to recover from the shock together with the financial markets, and demand for oil is improving.

Dmitriev is one of Russia’s main negotiators so this is a clear signal that Russia will not support the extension of current production cuts beyond July.

This means that the world oil supply will increase by 2 million barrels per day (bpd) in August. By that time, oil demand should recover significantly, and the market should be ready to absorb additional supply.

However, as shown by the stubbornly high oil inventories, demand strength is not guaranteed. In the upcoming weeks, traders will continue to watch inventory numbers closely to evaluate whether oil demand continues to recover.

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

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