Saudi Arabia eyeing output cuts to last till end 2020

Oil prices fall as traders price in concerns over future crude stocks, geopolitical tensions & COVID-19

OSLO/LONDON — Oil prices fell Friday morning as traders price in concerns over the future of crude stocks, geopolitical tensions and fears over how COVID-19 will progress. Rystad Energy’s Head of Oil Markets Bjornar Tonhaugen said: “This is the last trading day for the Brent July futures contract, which seems to ease quietly into its recent comfort zone range of around $35 a barrel.

While these sentiments have been affecting the pricing of the commodity, all are waiting for the next OPEC+ meeting to see where oil goes. The market, meanwhile, is also comfortable in a relative calmness.

“But the outcome of the meeting itself could create a very stable, or a very different scenario for supply and demand balances. Nothing is for granted in such meetings, OPEC+ has proved that this year,” Tonhaugen said.

He added, “Barring any major shock in global politics, the recovery in the crude markets seem to be ensured by the simultaneous recovery in daily road fuel demand indicators and gradual increase in refinery demand, while Russia and Saudi Arabia have also agreed to coordinate closely on supply management as we get closer to the 9 June OPEC+ meeting.”

On Thursday Oilprice.com reported that Saudi Arabia and several other members of OPEC are discussing the possibility of extending the current level of OPEC+ production cuts to the end of the year to support the market, but Russian oil firms could be the stumbling block, it said, citing sources at OPEC+ and Russia’s oil industry.

In a recent meeting, Russia’s oil companies failed to reach any agreement, as half of the firms supported the extension of the current cuts, while the other half of the oil executives were against extending the deep cuts and calling for the easing of the cuts, as per the OPEC+ agreement.

The OPEC+ group pledged in April production restrictions of 9.7 million bpd in May and June, before easing the cuts to 7.7 million bpd for July through December. According to Oilprice.com citing Reuters’ sources, Saudi Arabia would like to see the deeper 9.7-million-bpd cut extended through the end of 2020 to rebalance the market.

OPEC and the OPEC+ group are expected to meet via teleconference on June 9 and 10 to discuss the market fundamentals and possible tweaks to the deal they forged in April to cut nearly 10 percent of global oil production to support the market while demand is weak during the pandemic.

Russia plans to stick to the OPEC+ deal reached in April and ease the cuts after June 30, Russian officials and industry sources told Bloomberg on Wednesday.

Meanwhile, Russia’s President Vladimir Putin had a telephone conversation with Crown Prince Muhammad Bin Salman on Wednesday, during which “Both sides noted the importance of the joint efforts to reach the OPEC+ agreements on reducing oil production in April. They agreed to continue close coordination on this issue between the energy ministries.”

Commenting on the markets, however, uncertainty over the future direction of crude storage and concern over geopolitical tensions and future renewed restrictions are good enough reasons for lower prices, Rystad analyst elaborated.

“Yet, just a few weeks ago a market reaction would have been much larger, which shows that we have now entered a period of normality in trading, with huge price swings being a thing of the past for now. Supply developments and other geopolitical tensions that could affect demand are priced in, but not at exaggerated margins,” Tonhaugen said.

“The balance scale of incrementally bullish vs. bearish news flow for the value of crude shifted towards the bears over the past 24 hours, but only marginally. The global reaction to China’s move to propose new security laws for Hong Kong continues to increase, while there’s a score of new COVID-19 cases in South Korea.

“Meanwhile, reported fatalities in the US climbed to a week-high yesterday, spurring concerns about the oil demand recovery due to the increased risk of a second wave of restrictions as countries rush to reopen,” he added.

The physical crude market is though slowly healing, and the market is somewhat shrugging off the surprisingly huge build in the US crude stocks last week reported Thursday by the EIA (7.9 million barrels).

“The surprisingly high stock build was mostly caused by US refiners taking in a larger share of cargoes that have waited to discharge due to the oversupply situation over the past few weeks, leading to a jump in reported imports for the week both in the Gulf Coast and West Coast. Big swings could only return if COVID-19 restrictions do with a second wave,” Tonhaugen said. — Oilprice.com/ Rystad Energy