Oil prices have edged up on expectations that the Organization of the Petroleum Exporting Countries (OPEC) and its allies that include Russia may deepen cuts at its meeting to be held on this week - Photo: Privacy

JAKARTA (TheInsiderStories) – The Organization of the Petroleum Exporting Countries (OPEC) and its Russia-led allies, popular with the so-called OPEC+, looks to extend the oil production cut, as the world’ major oil exporters are wary of unleashing a surge of output that could wipe out the recent gains and put further pressure on their national budgets.

The OPEC+ monitoring committee will meet virtually on Wednesday to assess the group’ oil production rates and make a recommendation for future production. That could potentially hold back the supply recovery plan which will start next month.

The current plan is for OPEC+ to relax its quotas slightly so that the group’s total production rises by 2 million barrels per day starting in August. This gradual increase in production was agreed to back at the group’ April meeting and was originally supposed to take place in July. However, in early June, OPEC and Russia agreed to delay the production increase until August due to lagging demand.

In the virtual meeting yesterday, the technical committee outlined an additional plan of cutting 842,000 barrels per day from a number of countries such as Iraq, Nigeria, and Kazakhstan. The countries have all committed to continuing to keep oil production lower for several more months because these countries did not cut their production sufficiently in May and June.

The proposal will be discussed tonight by a ministerial monitoring committee led by Saudi Arabia and Russia. The committee is expected to announce an easing in production cuts of 9.6 million barrels per day due to recovered fuel demand.

Saudi Arabia has been very concerned with pressuring these countries to adhere to their production cuts and has made a public show of securing statements, especially from Iraq, about their continued commitments to fulfilling their obligations under the OPEC+ agreement.

However, oil demand elsewhere is not showing a stable or consistent recovery. Even though many parts of the United States (US) have relaxed lockdowns, gasoline demand remains far below typical levels for this time of year and in weekly deliveries has not shown a consistent trend upwards. In addition, the oil supply storage tank is still full. On paper, additional pruning could reduce the scheduled increase of 2 million barrels per day by almost half.

Demand for diesel and jet fuel remains severely depressed. Basing global trends on China’ recovery pattern may not be the best strategy since the US and other big oil consumers are not following in China’ economic footsteps. China may be ready to consume more oil, but the US is not.

Oil is a global commodity and has been relatively stable in the price for the last month. It is entirely possible that if global demand doesn’t behave the way the Saudis expect it to, putting another 2 million barrels per day of oil on the market at this juncture will exacerbate the oil glut and send prices down again.

Last month, non-compliant countries committed to patching the shortfall in trimming volumes in May, which amounted to 1.26 million barrels per day. However, the technical committee found that while some countries had increased production cuts in June, they still missed the target. Data shows, overproduction last month totaled 380,000 barrels per day.

“The transition to higher production coincides with the re-enactment of restrictions on movement in the US and other countries around the world. Where will oil supplies flow if people are ordered to return to their homes to reduce transmission?” said Louise Dickson, an analyst at Rystad Energy, quoted Bloomberg on Wednesday (07/15).

A monthly report published by OPEC provides insight into why in the midst of the ongoing economic downturn, easing cuts could be justified. OPEC crude demand is expected to rise and even exceed pre-pandemic levels by 2021.

During the second quarter, when Lockdown was at its peak, demand for OPEC crude oil was cut to almost half from last year’ level, just 15.87 million barrels per day. However, OPEC hopes to return to the previous level above 30 million in the fourth quarter.

Written by Lexy Nantu, Email: lexynantu@theinsiderstories.com