Compared to the planned Phase 1 OPEC+ cut of 9.7mbpd, the group achieved 9.23mbpd between May and July, with average compliance rate of 94%.
Global oil consumption improved by 3.03mbpd in July to 93.4mbpd reflecting reopening of industrial activities and some form of mobility.
Oil market recorded a net deficit of 4.7mbpd in July, with Brent crude spot prices averaging $43.3/barrel, up $2.5/barrel from the average in June.
Unprecedented Supply Cuts, Some Countries Still Faltered
OPEC compliance faltered in July, the last month of the first phase of the OPEC+ output cut deal. The production by 10 OPEC members in the accord increased by 0.979mbpd in July to 20.8mbpd compared to 19.8mbpd in June. As a result, compared to the resounding compliance rate of the cartel in June of 112%, compliance in July loosened to 96% as output fell short of the agreed cap of 20.55mbpd due to compliance breaches by some members and end of some voluntary cuts by Saudi Arabia, UAE and Kuwait. During the first phase of the deal (May to July), the cartel achieved average compliance rate of 97% (91% excluding excess cuts), helped largely by voluntary cuts by Saudi Arabia, UAE and Kuwait. Iraq and Nigeria continued to fall short of the agreed cut with compliance shortfalls of 16% and 19% respectively. Excluding the OPEC 10, production in Venezuela and Iran remain constrained by US sanctions, while the blockade of export terminals in Libya has kept output below 100kbpd.
Slower Rate of Inventory Decline Will Keep Prices Range Bound
Notwithstanding the expectation of the market remaining in a deficit over the rest of the year, with average of 4.1mbpd, crude oil prices are expected to be range bound due to the still elevated inventory levels occasioned by the cumulative market surplus of 38.3mbpd over H1 2020. Despite the gradual drawdown, U.S. commercial inventory are still 15% above the five-year average. According to EIA, compared to average of 6.4mbpd increase in inventories in H1, the drawdown over H2 will average 4.2mbpd. As a result, EIA forecasts Brent crude oil will average of $43.3/barrel over the rest of the year with 2020 average of $41.59/barrel (compared to year average estimate of $40.7/barrel in July) compared to average of $64.4/barrel in 2019. For us, we believe the gradual opening of key economies and minimal infection rate across could result in a rebound in oil demand with further upside potential for prices. However, an escalation of Covid-19 beyond Q3 could further worsen the outlook for crude oil demand and a free-fall in prices. Another downside risk for us is the resumption of production in Libya and Venezuela, which could add additional 1.7mbpd to current output.
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