Abu Dhabi, UAEThursday 13 August 2020

CORONAVIRUS

Oil markets to remain bullish following Opec+ decision to ease cuts

Much of the alliance's projected increase is expected to be absorbed domestically, leading to an undersupplied market

The Opec+ alliance agreed in April to draw back an historic 9.7 million barrels per day from the markets in May and June. AP Photo
The Opec+ alliance agreed in April to draw back an historic 9.7 million barrels per day from the markets in May and June. AP Photo

The slow phase-out of the historic production cut made by the Opec+ alliance is likely to have a bullish impact on oil markets, analysts say.

The joint ministerial monitoring committee of the group, which meets monthly to oversee compliance, on Wednesday evening recommended easing the level of cuts to 7.7 million barrels per day from August 1 onwards.

The group, led by Saudi Arabia and Russia, has been cutting back 9.7m bpd from the markets since May.

The current pact, the deepest ever cut implemented by the group, helped to counter oversupply concerns as demand and prices plummeted at the height of the coronavirus pandemic in April.

The JMMC is also bringing laggards who previously failed to meet agreed supply curbs in line, exacting pledges from Iraq, Nigeria, Kazakhstan and Angola to make compensatory cuts until September.

With the additional cuts, the total withdrawal from the markets will average 8.1m bpd.

"While the first phase of the oil market recovery was mainly about easing fears and a brightening mood, the coming months should see prices moving higher on the back of disappearing supply glut,” said Norbert Rücker, head of economics and next generation research at Julius Baer.

The Swiss lender expects oil prices to move beyond $45 per barrel this year.

Oil prices, which are currently trending near four month highs, jumped following the JMMC’s decision to recommend the easing of cuts. However, international benchmark Brent crude was down 0.78 per cent at $43.45 per barrel at 4.50pm UAE time. West Texas Intermediate, which tracks US crude, was down 1.16 per cent at $40.72 per barrel.

Swiss bank UBS forecasts Brent to average $40 per barrel in September and $45 per barrel in December, due to projected undersupply in the market.

Much of the output increase from Opec+ producers will be absorbed by domestic markets to meet seasonal demand for crude.

The JMMC said in its communique following Wednesday's meeting that the "seasonality of demand" for oil will be more pronounced this year, with a commensurate increase in demand for utilities and travel during the summer.

Saudi energy minister Prince Abdulaziz bin Salman said the kingdom’s planned increase in production will not be exported but would be consumed domestically. Russia is also expected to direct additional output away from export markets.

“This should reduce the market concern that the production increase might come too soon, considering that oil demand has not fully recovered and the path ahead remains fragile,” said Giovanni Staunovo, commodity analyst at UBS.

The committee also stressed further tapering the curbs until April 2022. The restrictions are likely to be further phased out to 5.8m bpd from next year onwards.

"Managing the transition to higher production levels juxtaposed with lingering macro vulnerabilities and virus concerns (especially following the reimposition of lockdowns in certain US states) remains front of mind,” said Ehsan Khoman, head of Mena research and strategy at MUFG Bank.

The bank expects Brent to cap the third and fourth quarters at $36 per barrel and $46 per barrel, respectively.

Updated: July 16, 2020 05:02 PM

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