Oil Slips As Saudi Arabia Ends Voluntary Production Cuts

Oil Video 08.06.20.

OPEC+ Extends Current Production Cuts By 1 Month

OPEC+ has managed to reach consensus on the extension of current production cuts for the month of July.

Only Mexico wanted to stick to the original deal. As Mexico’s share in total production cuts was negligible (100,000 barrels per day (bpd)), other countries did not insist on Mexico’s participation in the new agreement.

As a result, OPEC+ members will maintain production cuts of 9.6 million bpd in July in hope to support oil prices and decrease elevated inventory levels.

The group agreed to meet periodically in order to monitor the state of the market and adjust production cuts if necessary.

It looks like the key to the success of the current deal is future compliance by those countries (like Iraq and Nigeria) who have failed to comply with their quotas in May and June.

OPEC+ members agreed that such countries will make additional production cuts in July, August and September.

As I wrote earlier, it was hard to achieve a multi-month extension of current production cuts, so the resulting deal looks good for the oil market.

Saudi Arabia Ends Additional Production Cuts

In addition to production cuts specified in the OPEC+ deal, Saudi Arabia, Kuwait and United Arab Emirates delivered additional production cuts of 1.18 million bpd.

Saudi energy minister has recently announced that these production cuts will not be extended into July, which means that supply from OPEC+ countries will increase. It looks like Saudi Arabia shares Russia’s view that the oil market will be in deficit in July and sees no reason for voluntary production cuts beyond the OPEC+ deal.

Not surprisingly, such news put pressure on oil prices which have been in a rally mode since late April. Oil did not have any material pullback in the past few months so some traders will use Saudi Arabia’s decision as an excuse to take profits.

Now that there’s certainty about production cuts, oil’s price dynamics will depend on the market’s evaluation of the speed of the economic rebound. Judging by the equity rally, investors and traders expect a robust recovery. If the reality contradicts this narrative, most asset classes including oil will find themselves under pressure.

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