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Below is a complimentary research note from Energy Policy analyst Joe McMonigleIf you are an institutional investor interested in accessing our research email sales@hedgeye.com

OPEC Set to Extend Deepest Cuts at June Meeting - OPEC cartoon 11.18.2016  1

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.