OPEC’s Balancing Act is Wobbly

Risk level: RED

RED: Severe (+/- 4%) ORANGE: High (+/- 3%) YELLOW: Elevated (+/- 2%) BLUE: Guarded (+/- 1%)


-OPEC+ may have overshot.

-BP to cut headcounts by 10,000.

Crude oil prices looked set to establish a floor at around $40 per barrel after parties to the latest OPEC+ curtailment measure agreed to hold firm for another month. This round of OPEC+ discussion went forward without the usual nail-biting as the outcome of the meeting was apparent well before ministers met via video chat during the weekend. Gone are fears of overflowing storage as demand, particularly in China, picks up. Quarantines, meanwhile, are slowly easing and isolated segments of society are slowly returning to restaurants and shopping centers. But beneath the din of relief are worries that the bull run for oil, and the economy in general, may have gotten ahead of itself.

Since May 1, the price for Brent crude oil has closed in negative territory in only eight of the nearly 30 or so trading sessions. The global benchmark is on an unprecedented tear, spiking an astonishing 19.7% for the week ending June 5 to close at $42.30 per barrel. Brent was off to a relatively slow start on Monday, however, as reactions to the OPEC+ extension were muted by foresight.

Parties to an arrangement to withhold 9.7 million barrels per day from the market agreed during the weekend to maintain restraint for another month, to July. The agreement was brokered at first when the global pandemic was erasing a decade of economic growth. Storage tanks, meanwhile, were on the cusp of overflowing, leaving US crude oil trading in negative territory in April. Ann-Louise Hittle, an oil analyst with consultant firm Wood Mackenzie, said $50 crude is not out of the question as the market tightens. The firm, she added, now expects demand to pass total global supply in the third quarter, giving the price of oil an even bigger boost. By the third quarter, total global oil demand could be as much as 10 million barrels per day higher than the second quarter. But beware.

“Bringing supply back to the market is a daunting yet delicate balancing act, and for the OPEC+ partners, getting the timing right is critical,” she said in an emailed statement. “Our forecast assumes that the global shutdowns continue to ease. Should a second wave of the coronavirus pandemic emerge, the picture will undoubtedly change.”

New Zealand took the honorable distinction of zeroing out new cases of the coronavirus, though the achievement is an anomaly. Pent up frustrations with extended quarantines and the political and social state of affairs have resulted in mass protest movements across the globe. The divisions have revealed deep fissures in the American political realm, with the US commander in chief openly criticized by former military brass. Meanwhile, in almost partisan fashion, US states that moved too quickly on reopening are paying the price. A month into its reopening, the southern US state of Florida has as of Sunday seen five straight days with more than 1,000 new cases of coronavirus. In terms of the social unrest gripping the nation, we have yet to see the severity of new infections from too-close protests, though the threat is real.

Tired of months of negativity and market players may be giving too much emphasis to signs of economic improvement. Even if the math was a bit fuzzy last week, a double-digit jobless rate in the United States is nothing to celebrate. Japan, meanwhile, slipped into recession and is bracing for one its worst economic performances in decades. And while the price point for crude suggests economic recovery is well underway, the market is disconnected from reality. British supermajor BP on Monday revealed it would slash 15% of its headcount in response to the coronavirus strains. The company is already on a clear selling spree, mulling the sale of its $1 billion stake in an Omani gas project as well as assets in the North Sea. By the end of May, US supermajor Chevron had already announced plans to cut some 15% of its workforce, suggesting the US employment situation could remain suppressed well into the second half of the year.

Add to the negative economic outlook is word Monday that OPEC+ players out of compliance are left to self-monitoring to ensure they’re playing by the books. That’s in stark contrast to weekend headlines of Saudi Arabia cracking the whip on compliance. That gives tacit leeway to legacy cheaters such as Iraq to continue skirting their obligations. OPEC+ cohesion is bearish, but it may be too bearish. Morgan Stanley said Monday that consumption is unlikely to return to pre-pandemic levels before 2022. And if the price runs too hot, it would incentivize US shale producers to return in earnest, threatening the delicate market balance. Not to be outdone, should Brent climb too high, it may prove irresistible for some OPEC+ players.

“When the cuts are eventually unwound, production could rise sharply,” the investment bank said.

US economic policymakers were busy Monday talking about the possibility of another stimulus package by July. ECB chief Lagarde speaks later in the day. Balance of trade indices for the biggest economies in Europe are out on Tuesday, as are the latest estimates for euro-area GDP. A contraction of around 3% is expected. The JOLTS survey in the United States, meanwhile, is expected to show hiring is at a premium. Wednesday brings the usual EIA data as well as a gauge of core US inflation. The big deal for Wednesday, however, are the economic projections from the US Federal Reserve. The week ends with British GDP estimates and new loan issuances in China. It’s red ahead for Brent, with the benchmark expected to move on the week by at least +/- 4%

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