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Crude edges higher on Opec+ compliance promises

Traders see the positives as producers commit to even greater respect for quotas

The benchmark Ice Brent front-month contract was trading above $42.50/bl at Friday lunchtime, threatening to record its highest closing price since early March. Better-than-expected compliance with Opec+ production curbs and promises made by quota busters at Thursday’s joint ministerial monitoring committee (JMMC) to mend their ways are the major drivers.

The Ice contract closed just above $42/bl on 5 June but slipped back below $40/bl before the current rally kicked in yesterday. Today’s trading has seen the highest price levels since the collapse from $51.50/bl on 5 March to under $33.50/bl just three trading days later on 9 March.

Baghdad boost

Iraq’s promise to the JMMC—that it will compensate for producing 573,000bl/d above quota in May by undercutting its production target by 57,000bl/d in July and 258,000bl/d in August and September—has resonated most strongly. It “basically means that Iraq will keep production flat from July into August/September, when the Opec+ cuts are eased by a total of 2mn bl/d”, says Helge Andre Martinsen, senior oil analyst at Norwegian bank DNB Markets.

DNB had been assuming a quota compliance rate going forward of just 70pc from Iraq and fellow miscreant Nigeria, but “this might prove to be too pessimistic”, says Martinsen. DNB’s oil market balance for Q3 “might turn out to more undersupplied” than previous projections, he continues, giving further support to oil price bulls.

On a similar theme, “we have been sceptical about Iraq’s willingness or ability to meet its agreed target because of technical and financial challenges,” says Helima Croft, head of global commodity strategy and Mena research at bank RBC Capital Markets. “However, there are clear signs Baghdad is seeking to make amends, having ordered production cuts at its largest fields and reduced export volumes.”

“While we do not know exactly what transpired in the recent negotiations to compel Iraq to improve its performance,” Croft continues, “on prior occasions Riyadh has reportedly sought to link financial support to Opec compliance.”

"There are clear signs Baghdad is seeking to make amends, having ordered production cuts at its largest fields and reduced export volumes" Croft, RBC

Nigeria, together with fellow west African producer Angola, has until Monday to present its plan to both move into line going forward and make up for overproduction thus far. Croft notes that the head of the country’s state oil firm, Nigerian National Petroleum Corporation (NNPC), assured her in an interview she conducted with him under the auspices of the Atlantic Council thinktank last week that it “was absolutely committed to reaching full conformity” and promised quota busters would make additional adjustments.

But Croft is not totally convinced. "It remains to be seen whether [NNPC] will back words with action,” she cautions.  

Demand now centre  

“The compliance level has already been higher than most of the market participants expected and it seems that a better level is achievable,” says Paola Rodriguez Masiu, senior oil market analyst at consultancy Rystad Energy. “In effect, complying with the full amount of 9.7mn bl/d means shutting another 1mn bl/d daily production. That is not negligible, and it is definitely a boost factor for prices.”

“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 continues.

But the demand side holds an obvious risk: a second spike in the Covid-19 pandemic globally. Rystad notes traffic on Beijing roads has fallen sharply as authorities attempt to quell with a new outbreak there. And some US states, including Texas and Florida, are seeing record daily increases in cases.

“If the spread of the virus cannot 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,” Rodriguez Masiu warns starkly.

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