Opec+ Extend Deep Cuts

The Opec+ alliance of oil producers agreed on June 6 to extend unprecedented cuts to output for an extra month, in order to reduce the supply overhang caused by the coronavirus (Covid-19) pandemic.

Opec+ reached an agreement in mid-April to take 9.7mn b/d of oil supply offline in May and June, and ease the cut to 7.7mn b/d between July and December 2020. The initial, deeper cut has been extended until the end of July, however, Opec said in a statement.

Those countries that failed to meet their cuts targets in May and June will have to compensate for this with greater reductions during the rest of the year, Opec said. The main laggards are Iraq, Nigeria, Kazakhstan and Angola.

The August contract for Brent is up 1.3% at $42.84/b, while the July contract for West Texas Intermediate has increased by 0.9% to $39.91. Both benchmarks saw steady growth last week, amid recovering demand and expectations that Opec+ would extend the cuts.

In a research note, Edinburgh-based Wood Mackenzie said the cuts extension could result in Brent recovering to $45-50/b.

"The fundamentals show the oil market is recovering from March's price shock. Supply has shifted dramatically," Woodmac analyst Ann-Louise Hittle said, estimating that global production would be 6mn b/d lower in the second quarter than in the first.

"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," she said.

In the third quarter, an extra 2mn b/d of supply will be kept back thanks to the extension, Hittle said. Demand will surpass supply and oil storage levels will begin to fall.

"Bringing supply back to the market is a daunting yet delicate balancing act, and for the Opec+ partners, getting the timing right is critical," she said. "Our forecast assumes that the global shutdowns continue to ease. Should a second wave of the coronavirus pandemic emerge, the picture will undoubtedly change."