Oil prices climbed on Monday 8 June following the agreement of OPEC and its non-OPEC allies to extend the 9.7mn bpd production cut in June for another month
International benchmark Brent crude was trading at US$42.87 per barrel early on Monday morning after closing Friday at US$42.30 a barrel in anticipation of a deal.
The 11th OPEC and non-OPEC Ministerial Meeting held on 6 June by videoconference, under the chairmanship of HRH Prince Abdul Aziz Bin Salman, Saudi Arabia’s Minister of Energy, and co-Chair HE Alexander Novak, Minister of Energy of the Russian Federation, agreed the option of extending the first phase of the production adjustments agreed in April by one further month, meaning that OPEC and its non-OPEC allies will cut production by 9.7mn bpd in July rather than the scheduled 7.7mn bpd.
The Meeting noted additional voluntary adjustments from Saudi Arabia, the UAE, Kuwait and Oman in June; the announcements of voluntary adjustments from several other countries, such as Norway and Canada; as well as various oil company statements revising downward production plans and shutting in supply.
The Meeting noted how the production adjustments in May, alongside the emergence of many economies from the lockdowns due to the COVID-19 pandemic, have helped garner tentative signs of a recovery in the global economy and oil market. It reiterated the need to balance and stabilise the market, noting that global oil demand was still expected to contract by around 9mn bpd for the whole of 2020.
“This weekend’s deal was not only a breath for the market, but a whole new room full of oxygen,” commented Rystad Energy’s head of Oil Markets Bjornar Tonhaugen.
“These extra OPEC cuts increasingly tighten the crude and condensate balances. Crude inventories will continue to draw down to the tune of 3-4mn bpd over July-August, as crude supply may be reduced by an additional 2.5-3mn bpd in July, compared to only a tapering down of the cuts as per the original agreement from April. Overall, as long as the demand recovery in both products and crude remains intact, OPEC+ deeper cuts will ensure a solid foundation for oil prices into the summer months.”
He noted that on 7 June, Saudi Aramco utilised tighter market conditions by raising its monthly official selling prices (OSPs) for July by the largest amount in at least 20 years.
Ann-Louise Hittle, vice-president, Macro Oils at Wood Mackenzie, commented, “The 9.7mn bpd production cuts were already working; extending them an extra month will tighten the market more quickly. Supply has shifted dramatically, with total world supply on average for the second quarter down by a steep 6mn bpd from the first quarter of 2020.
“Global demand is recovering too, with both May and June climbing from the low seen in April as the coronavirus-related shutdowns continue to ease. We project world oil demand to surpass global supply and global oil storage levels to begin to draw down in the third quarter, putting upward pressure on oil prices.
“Demand is continuing to recover, with our forecast for the third quarter of this year seeing global oil demand 10mn bpd higher than it was in the second quarter, showing the recovery from COVID-19 lockdowns.”
However she added that the picture would change should a second wave of the coronavirus pandemic emerge.
