OPEC+ may be moving up its June 9/10 meeting to this week on June 4 and set to extend the deepest production cuts of 9.7 million barrels per day (b/d) currently in place for May and June. According to the historic April agreement, massive cuts were set to continue but at a lower rate of 7.7 million b/d for the rest of 2020. We expect an announcement today on the earlier meeting date.
More than a month ago on May 5 we said in a client note that OPEC was considering extending the 9.7 million b/d to address the huge demand hit as a result of the global shutdowns from COVID-19.
“We also believe there is a possibility of stronger OPEC+ action if necessary at the June meeting. One option that we are hearing is under consideration is extending the highest level of cuts at 9.7 million b/d for the rest of 2020 (instead of the current plan to reduce cuts to 7.7 million b/d starting in July). Not only would this be another welcome sign by oil markets, but it would also help to reduce global crude inventories faster than anticipated.”
----- Hedgeye Energy Policy Client Note 5-5-20
In our view, it’s not a question of if OPEC will extend the deepest cuts, but rather the duration of the extension.
The Gulf countries in OPEC support extending the 9.7 million b/d cuts of the rest of the year but there is not unanimity in the larger OPEC+ group. While Russia is committed to the cut deal and continued cuts at 7.7 million b/d for the rest of 2020, some Russian oil companies are skeptical about the need to extend at the higher 9.7 million b/d level.
King Salman and President Putin spoke by phone late last week in preparation for the OPEC+ June meeting and there seems to be some alignment, in our view.
We think the most likely outcome will be a compromise extension of 9.7 million b/d for another two months for July and August reassessing later whether to extend again or reduce cuts down to the 7.7 million b/d level.
Extension of the deepest 9.7 million b/d cuts even for an additional two months will be significant, during the highest summer demand season. OPEC is trying to stay ahead of the demand hit from the COVID-19 shutdowns but also start to impact record global crude storage levels. The April deal will reduce global inventories but an extension of the deepest cuts will accelerate the draw downs.
