Market set to tighten as OPEC+ agrees to extend 9.7 million b/d output cut

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(Wood Mackenzie) OPEC+ today agreed a one-month extension of the 9.7 million barrels per day (b/d) production cut. The extension will tighten the market further and could see Brent prices rise from the current $40/bbl toward $45-to-$50/bbl.

Ann-Louise Hittle, vice president, Macro Oils, said: “The 9.7 million b/d production cuts were already working, extending them an extra month will tighten market more quickly.

“In Wood Mackenzie’s view, the fundamentals show the oil market is recovering from March’s price shock. Supply has shifted dramatically, with total world supply on average for the second quarter down by a steep 6 million b/d 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.”

She added: “Wood Mackenzie already expected the supply and demand balance to tighten in the third quarter. With the extension, this rebalancing will accelerate as the additional 2 million b/d is kept out of the market for longer. 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.

“This trend does not depend on full adherence from all members of the OPEC+ group as we assume about 70% compliance on average, with some at higher rates than others.

“Demand is continuing to recover, with our forecast for the third quarter of this year seeing global oil demand 10 million b/d higher than it was in the second quarter, showing the recovery from Covid-19 lockdowns.

“However, while this recovery is remarkable, it still pegs demand 4 million b/d lower than the same quarter last year. This gives an indication of how quickly the fundamentals are changing – and just as OPEC+ decides to extend a nearly 10 million b/d production cut for another month.

“Bringing supply back to the market is a daunting yet delicate balancing act, and for the OPEC+ partners, getting the timing right is critical.”

Hittle 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.”

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