The output deal struck in April by Opec and its non-Opec partners was historically significant for both the depth and the duration of the cuts promised, and at the outset there was plenty of scepticism around over whether the Opec+ alliance could deliver.
But three months on, Opec+ has done a great deal to confound its critics, putting together a generally solid and disciplined response to the greatest demand crisis the oil industry has ever seen. The 9.7mn b/d package of output cuts put into effect in May, coupled with “organic” reductions from producers outside the alliance, have helped steer oil markets through the initial impact of the Covid-19 pandemic and lifted oil prices back above $40/bl.
The easing of lockdown restrictions in many major economies has supported a recovery in demand, with Argus’ own estimates pointing to global oil demand reaching 91.2mn b/d in June, up from 78.2mn b/d in the depths of the global lockdown in April. And the renewed vigour with which Opec’s de facto leader Saudi Arabia has sought to tackle the perennial problem of compliance has provided reassurance over Opec+’s commitment to restraining supply – the alliance’s own Joint Ministerial Monitoring Committee earlier this month put overall compliance with pledged cuts in June at an impressive 107pc.
Output restrictions will be eased in August and September to a nominal 7.7mn b/d from the baselines agreed earlier this year, theoretically putting nearly 2mn b/d of extra oil back on the market. But actual reductions are likely to remain above 8.1mn b/d, Saudi oil minister Abdulaziz bin Salman has said, with much of these months’ extra production in countries like Saudi Arabia and Russia expected to feed seasonal increases in domestic demand and therefore unlikely to add to volumes on international markets.
The market seems to be taking this message on board – 56% of respondents in this week’s Argus Twitter poll said they thought those more modest actual cuts of 8.1mn b/d in August and September would still be enough to keep oil prices above $40/bl – while there’s also a feeling among the Opec leadership that the worst of the crisis may now be over.
It’s important to remember, however, that the coronavirus pandemic and its impact on economies and oil markets are likely to provide a test of stamina, not just of strength, and that the duration of the Opec+ cuts – the deal agreed in April stretched all the way out to early 2022 – is going to be as important as their depth.
As lockdowns have been eased in many countries in recent weeks – often with alarming results in terms of fresh increases in Covid-19 cases and infection rates -- medical experts have been warning that the world will be living with the virus not for months, but for years and possibly even decades. The Spanish flu pandemic of the early 20th century took a full two years to abate, and the virus was not fully eradicated until several decades later.
The reality of such long timelines is that the world economy will adapt, as it is already doing, while it awaits the discovery and wide-scale deployment of an effective vaccine. A degree of economic normality will be restored, but within certain pandemic-proscribed boundaries, with potentially serious implications for oil demand via the impact on both local and long-haul travel.
There may also be a more structural oil supply response to the pandemic, as the cuts in investment implemented this year in response to lower prices feed through into lower production, easing some of the pressure on the Opec+ partners. But that too will take several years to materialize. So the likelihood for Opec and its allies is that they are going to have to play a long game – and one which will make maintaining currently impressive output discipline all the more challenging.
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