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Oil market improving, but full OPEC+ compliance needed: monitoring committee

Highlights

Q4 could see 97% of pre-pandemic demand

Global oil inventories shrinking from peak

Compensation cuts to be discussed

London — The oil market is on the path to rebalancing, but with uncertainties about how quickly the world can recover from the COVID-19 pandemic, the Saudi and Russian co-chairs of a key OPEC+ monitoring committee on Aug. 19 urged their counterparts to remain disciplined in adhering to their committed production cuts.

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"As we go forward, we should strive to achieve full adherence to our agreement," Saudi Energy Minister Prince Abdulaziz bin Salman said in his opening remarks to the Joint Ministerial Monitoring Committee meeting. "Not only does this accelerate the rebalancing of global oil markets, it also sends out a serious message that there is a new spirit of determination and discipline in our group."

Russian Energy Minister Alexander Novak said the market was still "extremely fragile," and despite the 23-country OPEC+ coalition's 95% compliance level with its production cuts in July, members should remain cautious.

"The market remains extremely volatile and we should keep 100% conformity of the deal," he said. "Now more than ever it is extremely important to deliver full commitment to the deal and closely monitor the market."

The alliance implemented the largest coordinated production cut in the oil market's history in May at 9.7 million b/d -- about 10% of pre-pandemic demand -- as prices plunged from the impact of COVID-19 on the global economy, as well as a short-lived price war in April after OPEC+ initially failed to agree on a supply accord.

Prices have stabilized around $45/b in recent weeks, and the coalition has eased its cuts to 7.7 million b/d from August through the end of the year, in anticipation of higher demand.

The world is expected to reach about 97% of pre-pandemic oil demand in the fourth quarter, Prince Abdulaziz said, based on the projections from analysts in the International Energy Agency, the US Energy Information Administration, OPEC and other forecasting agencies.

"Over the past three months, there has been a significant improvement in the fundamentals of the global oil markets," he said. "We see encouraging signs that energy demand is recovering, as economies continue to reopen in many parts of the globe."

Novak noted the "first signs of a slowdown in global inventory build-up," saying that as of July, commercial oil stocks held by OECD countries had shrunk by about 13 million barrels from their peak.

Compensation cuts

Some of the increased OPEC+ production will be offset by so-called compensation cuts by members that violated their quotas in May, June and July.

Those countries, which include Iraq, Nigeria and Kazakhstan, will have to make extra cuts beyond their already committed cuts in August and September to make up for their excess production.

The JMMC's agenda includes a review of those plans, and Prince Abdulaziz said he hopes those countries will be earnest in their intentions.

"We should endeavor to put this temporary compensation regime behind us, by clearing all the past over-production by end of September," he said.

Algerian Energy Minister Abdelmadjid Attar, who holds the rotating OPEC presidency for 2020, said in his opening remarks that the pace of the oil market's recovery could have been hastened if all members had stuck to their quotas.

"As always, it's implementation that matters the most," he said in his opening remarks.