OPEC+ meets to consider oil cut extension but some members want to pump more

London — OPEC and its allies have begun their formal meeting on June 6 to put what many members hope are the finishing touches to a deal that would extend historic production cuts and bolster the oil market's nascent recovery.

The so called OPEC+ coalition's 9.7 million b/d of oil cuts are scheduled to roll back to 7.7 million b/d at the end of June, but ministers are expected to approve an extension through at least July. A short-term deal would enable the alliance to protect hard-won recent gains in oil prices, but also remain flexible to prevent an overtightening of the market.

Under the plan -- endorsed by co-leaders Saudi Arabia and Russia -- a key ministerial monitoring committee that they chair would agree to meet monthly to assess market conditions, according to sources involved in the talks.

But Mexico's apparent refusal to commit to continued production restraint and Iraq's lack of credibility on implementing its agreed cuts could complicate the negotiations and dilute the impact of the deal.

The alliance may also have to factor in a potential revival of Libyan production, as the war-torn country appears poised to restart almost 400,000 b/d amid talks between state-owned National Oil Corporation and tribal groups controlling fields in the south. Libya is exempt from the cuts.

Oil prices have surged in recent weeks, prompting several US shale operators to scale back their production curtailment plans. Since hitting an 11-year low on April 21 at $13.24/b, Dated Brent has zoomed up 210% to hit $41.00/b on June 5.

Oil demand is improving as global economic activity picks up as consuming nations ease COVID-19 pandemic lockdowns. However, a full market recovery is still not assured, Algerian energy minister Mohamad Arkab, who holds the OPEC+ presidency for this year, cautioned in his opening remarks.

"We cannot rest on our laurels," he said. "We have to review and decide on the best way forward. The challenges that remain are daunting."

Mexico and Iraq

The market has seen an unprecedented collapse in oil consumption, with OPEC itself projecting a contraction of some 9.1 million b/d for 2020 – about 9% of pre-pandemic demand.

The OPEC+ coalition forged its 9.7 million b/d cut agreement — the largest coordinated supply accord in the market's history —in April as oil prices were in freefall.

Mexico, however, had balked at its prescribed 400,000 b/d cut, given its plans to boost oil production as an engine for economic development. It eventually agreed to rein in 100,000 b/d, but President Andres Manuel Lopez Obrador said June 5 that he considered his country's contributions to the deal finished.

"We have already complied," the president said during his daily press conference on June 5. "We have closed oil wells to comply with our commitment; we couldn´t reduce our production any further."

Iraq's lack of compliance with its quota has also been a sore spot for OPEC+ members. Saudi Arabia and Russia over the last week have heavily pressured Iraq – as well as fellow quota busters Nigeria, Angola and Kazakhstan – to compensate for their overproduction by making extra cuts in the coming months.

Delegates said all had agreed to the plan, but analysts say Iraq's fractured politics and potential financial hit if it forces international oil company partners to shut in production make the country unlikely to fulfil its commitment, let alone come through with deeper cuts.

OPEC+ members may have to divvy up Mexico's cut and possibly even Iraq's expected lackluster compliance to implement their 9.7 million b/d cut extension. Saudi Arabia, the UAE and Kuwait had previously agreed to institute an additional 1.2 million b/d in cuts for June but had indicated they would not be willing to continue those curbs in July.

"If Iraq is being asked to make up 600,000 b/d of cuts missed in May over the next few months in addition to their 1 million b/d of commitments, ... that is an almost impossible ask, one that Iraq is highly unlikely to meet and the market would not view as credible," said Mohammad Darwazah, an analyst with Medley Global Advisors.

Eye on Trump

The meeting is sure to be closely watched by US officials, who were heavily involved in the April negotiations on the current cuts despite not committing any American companies to any quotas.

US President Donald Trump is largely credited with bringing together Saudi Arabia and Russia, after they had feuded during a March OPEC+ meeting and launched a bruising price war. US producers, particularly shale operators reeling from the price collapse, had urged the president to broker a deal.

Trump, who had previously railed on OPEC and Saudi Arabia when he felt they were driving prices too high, on June 5 said his diplomacy had "saved that industry in a short period of time."

"That would have been catastrophic to lose it, and now it's up to almost $40/b," Trump told reporters. "People would have said that's impossible but we got Saudi Arabia, Russia and others to cut back very substantially — OPEC+. We call it OPEC+."