Oil prices continued to gain on prolonged enthusiasm from Thursday’s OPEC+ meeting; with traders expecting increased production-cut compliance and regaining trust that supply is under control.
Oil prices pushed higher in early trade on Friday, building on gains in the previous session. This is after OPEC producers and allies promised to comply with supply cut commitments. Two major oil traders also said demand was recovering well.
US West Texas Intermediate (WTI) crude futures climbed 14 cents, or 0.4%, to $38.98 a barrel at 0101 GMT. While Brent crude futures crawled up 7 cents, or 0.2%, to $41.58 a barrel. Both contracts rose around 2% on Thursday.
Commenting on the market enthusiasm, Rystad Energy’s Senior Oil Markets Analyst Paola Rodriguez Masiu said, “It’s clear, there is enthusiasm in the market that oil supply is still under control. A positive OPEC+ meeting does that and yesterday’s (Thursday) session helped renew confidence that members will further cut production to comply with the 9.7 million bpd agreement.
“OPEC+ seemed serious about it, pointed the finger to specific countries, which either already have a plan to meet their commitments or are required to present one next week.”
Masiu added, “The compliance level has already been higher than most of the market participants expected and it seems that a better level is achievable.
“In effect, complying with the full amount of 9.7 million bpd, means shutting another million barrels of daily production. That’s not negligible and it is definitely a boost factor for prices.”
Masiu also pointed out that the grouping while stressing on compliance did not extend any recommendation toward further cuts.
“Note that although there was no recommendation to extend the deep cuts into August, prices still rose yesterday and kept rising today. The 40-dollar levels we see are here to stay it seems, and need no further support than the existing agreed cuts,” she said.
“Prices from now on should grow naturally, without further artificial support from the supply side. Demand will be the force than will drive the market recovery from now on,” she added.
Clouds on the horizon
She, however, had a word of caution, warning, there are some clouds on the horizon. Traffic in Beijing roads has fallen sharply as authorities attempt to quell with a new coronavirus outbreak. All while some US states including populous states as Texas and Florida are seeing record daily increases in cases.
“The investors alert alarms are sounding loud and clear: if the spread of the virus can’t be brought under control and governments need to resort to the same measures that brought much of the global economy to a standstill, it will crush the oil markets,” Masiu said.
“And this thought may curb some of the oil price gains next week; depending on the action that we will see taken by countries around the world.”
Despite the demand concerns clouding the demand recovery, for now, positivity is now in the driving seat. Traders sit confident, as the de-facto leaders of OPEC+ grasped the nettle; giving ultimatums to laggards and adding credibility that the deal will take all the promised crude off the market, she said.
“We believe Iraq this time has a fair chance of succeeding with the acrobatic feat of cutting its output; as the government has a monetary compensation fee mechanism agreed with the IOCs in Basrah,” Masiu stated.
“However, for now, we stay cautious and see Iraqi crude production falling down to 4.0 million bpd for July; with another 250,000 bpd to go. In case of reducing KRG supply, we could also see supply close to the target,” she added.