OPEC+ is likely to ease its crude oil production cuts from 9.7 million bpd to 7.7 million bpd starting next month as the extended oil group saw signs of improving demand.
The Wall Street Journal reported, quoting OPEC delegates, that Saudi Arabia and most of the members of OPEC+ are in favor of relaxing the cuts agreed in April.
“If OPEC clings to restraining production to keep up prices, I think it’s suicidal,” one unnamed source told the Wall Street Journal. “There’s going to be a scramble for market share, and the trick is how the low cost producers assert themselves without crashing the oil price.”
The OPEC+ cuts of 9.7 million barrels per day have had a relatively modest positive effect on oil prices so far, not least because the amount of crude oil in storage around the world was until recently still well above the maximum for a balanced market.
Despite recovering demand that has reduced the global supply overhang somewhat, there are growing fears, including within the oil industry, that some lost demand will not back anytime soon. That’s despite a note of optimism that the IEA sounded in its latest Oil Market Report, saying the worst of the coronavirus crisis and its effect on the oil industry is behind us.
It wasn’t smooth sailing for OPEC+: bringing all members into compliance proved to be tricky and slowed down the positive effect of the cuts on international prices. Eventually, Saudi Arabia had to literally threaten laggards Iraq, Nigeria, and Angola with another price war to get them in line.
They have yet to achieve 100-percent compliance with the production quotas, even if cuts are relaxed from next month, as Saudi Arabia has insisted that these three cut deeper than agreed to make up for quota compliance shortfalls in May and June.
By Irina Slav for Oilprice.com
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While the OPEC+ cuts have had a modest impact on oil prices so far, they nevertheless succeeded in putting a solid floor under oil prices preventing them from sliding downward again. They certainly have helped reduce a huge glut in the market.
Oil prices are expected to hit $45-$50 a barrel during this half of 2020 and touch $60 in early next year.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London