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PublicInvest Research

Author: PublicInvest   |   Latest post: Tue, 22 Jun 2021, 9:57 AM

 

Oil & Gas - A Month Extension

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Brent and WTI oil prices surged above USD43/bbl and USD40/bbl over the weekend, reacting positively to OPEC+ members extending the oil production cut by a month to end-July. Additionally, the Group is also adopting a more stringent approach to ensuring members not break their production pledges. Those that had not implemented 100% of its production cuts in May and June such as Iraq and Nigeria will now make extra reductions from July to September to compensate for their failings. The group will review its production policy on a monthly basis. All said, the deal is a positive and much-welcomed development with oil prices likely to be well supported in the longer run due to the expected supply deficit in 3Q. While the worst appears to be over for oil market amid the reopening of economies around the world and coronavirus lockdowns being eased presently, we also see markets already pricing-in this development. Crude consumption has not returned to pre-confinement levels however. As the vaccine for Covid-19 has yet to be found, consumer sentiment and spending will remain relatively subdued. We maintain our Neutral stance on the sector at this juncture.

  • A month extension... OPEC members, led by Saudi Arabia, and other key oil producers led by Russia agreed to extend their historic output cuts through July. Under the April agreement, OPEC+ pledged to cut output by 9.7 mbbls/day from May until the end of June. The cuts were then to be gradually eased from July to 7.7 mbbls/day until December. From the Saturday meeting, the agreed cut for July was 9.6 mmbls/day, just 100 kbbls/day below the earlier agreement due to Mexico’s non-participation.
  • …with more stringent conditions. The Group is also adopting a more stringent approach to ensuring members not break their production pledges. Those that had not implemented 100% of its production cuts in May and June such as Iraq and Nigeria will now make extra reductions from July to September to compensate for their failings. As of May, the Group reduced output by around 8.6 mmbls/day, less than planned, with OPEC reducing production by 5.84 mmbls/day to 24.6 mmbls/day. The overall compliance rate was 77%. Iraq and Nigeria executed less than half of their agreed reduction at 42% and 34% respectively. The group will review its production policy on a monthly basis.
  • Oil prices will be well supported. The extension of oil production cuts by OPEC+ is expected to support oil prices in the longer run amid countries easing lockdown measures as demand picks up with up the reopening of economies around the world. The extension is also expected to lead to a supply deficit in 3Q. Nonetheless, we also see markets already pricing-in this development. Crude consumption has not returned to pre-confinement levels however. As the vaccine for Covid-19 has yet to be found, consumer sentiment and spending will remain relatively subdued. Moreover, if oil prices continue to edge up, questions will grow as to how fast shut-in US production will be turned back on. We maintain our Neutral call on the sector at this juncture.

Source: PublicInvest Research - 9 Jun 2020

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