The meeting of OPEC’s ruling commission hasn’t even started yet, and there have already been issues.
It was originally supposed to happen on Monday and Tuesday this week, with a declaration at the end of Tuesday’s session.
However, the meeting has been delayed by a day so far, and now we expect the declaration on Thursday.
Despite the rocky start (or lack thereof), we don’t expect this meeting to be as contentious as prior sessions. Since the latest agreement of cuts has come to an end, most members remain at least open to maintaining lower production.
The economic impact of the on-going pandemic is taking its toll. And, with uncertainty about how much longer the world economy will be in trouble, there is less appetite for geopolitical shenanigans.
The Cost of Low Prices
Across the board, all major petroleum companies have taken significant losses.
As a measure of the impact, the world’s largest crude producer, Saudi Aramco, saw their profits drop to nearly a quarter of what they were in the prior year.
State-run producers are seeing their income diminish significantly. And there’s nothing like a loss of profits to get OPEC members to agree!
That doesn’t mean geopolitical issues that could affect oil have gone away. They just likely won’t be as much inside OPEC.
Over the weekend, reports came out that China is looking to stock up on oil, putting out orders for as much as 20 million barrels in tanker capacity. That compares to 508 million barrels imported in the whole of last year.
Compliance Has Been Waning
The agreed amount to be cut through July was 9.7M barrels a day.
Starting August 1st, cuts were tapered to 7.7M. But, according to the head of the JMCC, actual compliance levels hovered around 8.1-8.3M barrels per day in cuts.
So far, collective OPEC production has increased by 1.1M barrels since the beginning of the month.
Oil prices have held their ground, however. That’s mainly because of a faster than expected pick up in oil demand following the end of lockdowns.
US oil production also remains depressed, as many companies struggle with increased debt and higher production costs. The pace of bankruptcies has finally started to increase; while more solvent companies are prioritizing acquisition opportunities over restarting production.
The latest Baker Hughes rig count showed a further reduction in drilling as companies are reluctant to start a new production.
The Outcome of the Meeting
Several analysts have suggested that crude has settled into a “new normal” of a $40-45/barrel range. That is until a vaccine or treatment for COVID finally puts the pandemic behind us.
There is a pretty broad consensus that the JMMC meeting will largely leave things as they are, confirming the current 7.7M cuts until at least the end of September.
A smaller number of analysts suggest the potential of a slight easing of the cuts by 500K to 1M barrels – which we don’t expect to be enough to significantly alter the latest price dynamics.
