OPEC, Russia May Extend Output Cuts To Support Crude Prices, But Timeline Uncertain

The Organization of the Petroleum Exporting Countries and Russia – otherwise known as OPEC+ -- is reportedly considering extending an agreement on production cuts in order to keep supporting crude oil prices.

But there is some confusion over how long the output cuts will last.

The oil producers are considering a proposal to roll over supply curbs for one to two months. Reuters reported that instead of gradually lowering output cuts in July, Saudi Arabia and some Gulf states wants to maintain them until the end of the year. But Russia does not favor that timeline.

“It is the proposal now, but it is yet to be finalized," said one OPEC+ source about the 1-2 month extension.

"It's for a month or two, not for half a year," said a Russian oil source.

Bloomberg reported that some OPEC delegates favor taking short-term measures given how unpredictable the oil markets have become and to avoid any supply disruptions.

In a note to clients, Amrita Sen, chief oil analyst at consultant Energy Aspects Ltd., wrote: “The Saudis are clearly looking for support from other members to keep production levels lower for longer.”

But as of Monday morning, West Texas Intermediate and Brent crude futures were both down 1% to 2%.

“The fact that crude ... prices have not reacted much to the news of the potential cut extension can be seen as a sign that the market has already priced in a lot of optimism,” analysts at JBC Energy analysts wrote.

Algeria, which currently holds the rotating OPEC presidency, proposed that the group move up their planned to Thursday rather than June 9-10. Russia has said it has no objection to an earlier meeting. Russia’s acquiescence may suggest it is on board with extended output cuts – though it is unclear over what timeframe Moscow will agree to.

In April, OPEC+ mandated a cut in oil production by 9.7 million barrels per day, or about 10% of global output, in order to push up prices decimated by plunging demand due to the spread of the coronavirus. Saudi Arabia, Kuwait and the United Arab Emirates then made additional voluntary cuts of 1.2 million barrels a day for June, raising the total OPEC+ reductions to nearly 11 million barrels a day.

In May, OPEC’s oil production sank to its lowest level in two decades.

Since late April, WTI crude prices have surged from below $10 to $35 per barrel – although this figure remains well below prices from a year ago.

However, overall compliance with the production cuts was only about 75% as OPEC members Nigeria and Iraq did not fully comply with their share of output cuts. Nigeria and Iraq have long been criticized by other cartel members for repeatedly failing to meet production cuts.

Moreover, the $35 price remains insufficient for most OPEC producers to cover planned government spending.

Now oil traders worry that escalating tensions between the U.S. and China over Beijing’s controversial new security law may continue to weigh on oil prices. President Donald Trump has threatened to revoke Hong Kong’s special trade status.

“The possibility of heightened tensions does pose a risk for the recent rally in oil prices,” said Harry Tchilinguirian, head of commodity research at BNP Paribas.

Meanwhile, Credit Suisse oil analyst Bill Featherstone said that the oil and gas industry is likely facing a long recovery after having passed the worst of the pandemic-related crisis.

“The bottom is past and a long recovery now underway,” he wrote.