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OPEC+ extends output cuts, but oil price gains threaten to unleash more supplies


Deal keeps 9.6 million b/d in OPEC+ cuts through July

Price rise has prompted US producers to lift curtailments

Libyan revival could dilute cuts, Iraq compliance in doubt

London — OPEC and its allies have agreed to maintain their record oil cuts through July -- albeit without Mexico -- to help steer the market through its nascent recovery from the COVID-19 pandemic.

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Ministers on June 6 approved a one-month rollover of their now 9.6 million b/d production cut accord, brushing aside Mexico's defection from the pact and receiving pledges of improved compliance from Iraq, Nigeria, Angola and Kazakhstan. The cuts -- originally 9.7 million b/d including Mexico -- had been scheduled to taper to 7.7 million b/d in July through the rest of the year.

But potential supply increases from both within and outside the OPEC+ alliance could dilute the deal's impact and delay the rebalancing of the market.

Already, oil prices have surged in recent weeks, prompting several US shale operators to scale back their production curtailment plans, while Mexico is now free to resume its efforts to boost output.

Iraq's ability or willingness to rein in any more production is in doubt, and Libya's state oil company is in talks with tribal groups controlling key fields that could lead to an imminent 400,000 b/d production revival. Though an OPEC member, Libya is exempt from its cuts.

Saudi Arabia, the UAE and Kuwait had previously agreed to institute an additional 1.2 million b/d in cuts for June but have indicated they would not be willing to continue those curbs in July.

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.

"We question the stability of the bargain in a rising price environment," analysts with ClearView Energy Partners said in a note.

A monitoring committee led by OPEC+ kingpins Saudi Arabia and Russia will meet June 18 and monthly thereafter through the end of the year to stay abreast of market developments and recommend any adjustments to the deal. The next formal OPEC meeting will be November 30 in Vienna, if the pandemic abates enough to allow ministers to travel and the wider OPEC+ alliance will gather December 1.

The meeting's result -- which came after several days of telephone and online diplomacy between the 23-member coalition -- matched the market's consensus expectations, but its effectiveness in bolstering prices will come down to how earnestly it is implemented. Several ministers emphasized the point.

"Each country has to adhere to its commitment to restrain production along the agreed guidelines," Saudi energy minister Prince Abdulaziz bin Salman said in prepared remarks. "Effective compliance is vital, if we are to secure the hard-won stability in global oil markets and restore confidence in the unity and effectiveness of the OPEC+ group."

Iraq's challenges

Under the deal, Iraq, Nigeria, Angola and Kazakhstan -- whose May production exceeded their quotas -- will compensate by implementing deeper cuts in the amount of their overproduction for July, August and September.

The hard bargain, which Iraq had resisted, according to delegates involved in the talks, came at the insistence of Prince Abdulaziz and Russian counterpart Alexander Novak.

Iraq's lacklustre compliance has long been a sore spot for OPEC+ members. 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's second-largest producer pumped 4.15 million b/d in May, exceeding its quota by about 560,000 b/d, according to a preliminary S&P Global Platts estimate.

"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.

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, with a sizeable 1.5 billion barrel stock build during the first half.

The OPEC+ coalition forged its cut agreement -- the largest coordinated supply accord in the market's history -- in April as oil prices were in freefall.

Oil demand is improving along with global economic activity, as consuming nations ease COVID-19 pandemic lockdowns. However, a full market recovery is still not assured, ministers readily noted, in advocating for the production cut extension.

"The market is still in a fragile state and needs our support, that's why today more than ever it's important to adhere to 100% conformity to obligations we took on in April," Russia's energy minister Alexander Novak said. "We see that our efforts have led to a clear positive impact on the global oil market but at the same time we need to do more."