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Highlights

Record output cuts roll back to 7.7 mil b/d in August

Members exceeding quotas to make compensation cuts

Recovery from coronavirus crisis, summer demand to tighten market

London — OPEC and its allies will ease their record production cuts on schedule in August after they helped pushed oil prices back above $40/b from their historic lows in April, ministers said July 15, confident that recovering global demand will soak up the additional supply.

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The 23-country OPEC+ coalition enacted a 9.7 million b/d production cut accord starting in May in response to the coronavirus crisis, but will roll the deal back to 7.7 million b/d in August through the end of the year, under the terms of the agreement laid out in April.

"While there could be localized or partial lockdowns re-imposed in some places, the recovery signs are clear, both in physical and futures markets." the Joint Ministerial Monitoring Committee, co-chaired by Saudi Arabia and Russia, said in a communique.

Saudi energy minister Prince Abdulaziz bin Salman said the cuts would actually be larger than 7.7 million b/d, since countries that exceeded their quotas in May and June have agreed to make extra compensation cuts in the third quarter.

An OPEC+ document seen by S&P Global Platts shows that 13 countries pumped above their quotas in the first two months of the deal by a combined 840,000 b/d, which if fully accounted for with compensation cuts, would offset a significant chunk of the coalition's scheduled production increase.

"The increase signals an OPEC+ desire to keep the market somewhat tight amid rising domestic consumption (not adding much to exports), but not pushing prices too far or ceding share as non-OPEC shut-ins return," said Shin Kim, Platts Analytics' head of supply and production.

OPEC data shows overall quota compliance has been strong since May at 98% for OPEC members and 96% for the 10 non-OPEC partners but that it has been uneven among individual countries.

Iraq produced the most over its cap, by 348,000 b/d, followed by Nigeria on 136,000 b/d, Kazakhstan on 89,000 b/d and Angola on 72,000 b/d, according to the data.

Countries have until the end of July to submit to the committee their plans for those extra cuts, according to the communique. Prince Abdulaziz said that accounting for the May excess would take the scheduled cuts to around 8.1 million or 8.2 million b/d in August, though the June overages have yet to be added to that total.

He said that global oil demand was picking up, and seasonal consumption by many OPEC countries in the Middle East, where peaking power generation for air conditioning is largely fueled by oil, would further tighten the market. Saudi Arabia itself would account for 500,000 b/d of incremental demand in August, Prince Abdulaziz said, which would keep the kingdom's crude exports flat, even with the scheduled increase in production.

"As we move to the next phase of the agreement, the extra supply resulting from the scheduled easing of production cuts will be consumed as demand continues on its recovery path," Prince Abdulaziz said.

TIGHTENING THE MARKET

Analysis by the OPEC Secretariat seen by Platts indicated that full conformity with the new quotas, in addition to the compensation cuts, could result in global oil inventories falling to some 100 million barrels below the five-year average that the OPEC+ coalition has said it is targeting. But that is conditional on the COVID-19 pandemic being contained.

In May, OECD oil stocks rose relative to the five-year average for the fifth straight month, coming in at 3.17 billion barrels -- 209.5 million above the benchmark, according to OPEC's most recent monthly oil market report.

"Yes, we are mindful of the fact that we have the virus that we have to attend to, that we will use every tool in our kit to mitigate any possibilities that might emerge," Prince Abdulaziz said. "But we are also mindful that the world has learned a lot of lessons [about the pandemic] in the last few months. The amount of learning that has happened over the last six or almost seven months is sufficient for us to say that whatever may happen will be most likely contained."

The worst of the coronavirus crisis appears to have crested in April, but to stay abreast of any developments, Russian energy minister Alexander Novak said the monitoring committee should continue to meet monthly to stay abreast of market developments.

The committee's next meeting has been scheduled for August 18, with a delegate-level technical committee meeting the day before. The committee can recommend to the wider coalition any changes to the deal, as needed, which would then need to be ratified through an emergency meeting of all members. The next full OPEC+ meeting is scheduled for November 30 and December 1 in Vienna.

"We have not only assessed the results of the past month but looked at how the market is developing and verified our forecasts and estimates against reality," Novak said. "Today we are experiencing a market which is very close to balance and showing both signs of fragility but nevertheless stability."

He agreed with his Saudi counterpart in saying that the reduction of OPEC+ quotas "should not impact markets and lead to an increase in exports."

"The lifting of restrictive measures leads to an increase in demand in the domestic market, which is also happening in the Russian market. Most will go to the domestic market," he said.