OPEC is sticking to its word, even if that word is worth less than it was. The oil producer group and allies like Russia, collectively known as OPEC+, on Wednesday vowed to raise crude output in August, partly reversing earlier cuts that reduced global supply by 10%. The cartel’s ideal scenario of more oil and higher prices might be within sight.
Covid-19 knocked daily demand in what is usually a 100 million-barrel-a-day market to only 82 million barrels during the second quarter, Morgan Stanley reckons. In that light, the Organization of the Petroleum Exporting Countries’ de facto head Saudi Arabia has done a creditable job. OPEC+ said in April that it would cut daily supply by 9.7 million barrels, then add back around 40% of that by the year end, in stages. Wednesday’s pledge is one of those stages, albeit delayed by a month.
In the current haywire environment, doing something like what was promised counts as a win. Further burnishing its leadership credentials, Saudi has convinced refuseniks like Angola, Nigeria and Iraq to belatedly undertake cuts they welshed on over the past couple of months. Over the next few months, oil supply will end up around 8.5 million barrels a day less than it was in May.
If the global economy can steadily recover for the rest of the year, Saudi should come out as a winner. With demand once again outstripping supply, a global glut of spare oil that neared 5 billion barrels in May would continue falling back to a five-year average of around 4.2 billion barrels. That in turn would encourage oil prices hovering around $40 a barrel to move higher.
OPEC has two problems. A second wave of coronavirus would reverse the recovery in oil consumption, and require fresh cuts. And even if not, price rises are likely to remain pretty modest. Shale production in the United States is effectively economic again, and with petrostate budgets in a mess, OPEC+ members will be straining to pump what they like. Higher prices encourage more supply, a law even Saudi can’t bend to its will.