The cartel’s analysis (linked below) assumes rapid demand recovery
“As OPEC begins to unwind its historic May output cuts, it risks overestimating the pace of the oil demand recovery and flooding markets with supply before they are ready to absorb it all. Yet it also runs the risk of not cutting enough.”Forbes, 7/15/2020
Source article (opens in new tab): OPEC Will Relax Crude Output Cuts, Betting On Rebound In Economic Growth
- OPEC+ decided to reduce supply curbs from 9.7 MMBbl/d to 7.7 MMBbl/d starting in August
- The actual cut next month will be 8.1-8.3 MMBbl/d, from the 9.7 MMBbl/d reference amount, due to compensatory curbs from certain members
- The cartel’s July market report (link) outlines demand recovery that would support more supply
- “Almost all of the output hikes will be consumed in domestic markets of the producing countries as the demand is recovering” – Russian Energy Minister Alexander Novak
OPEC+’s move to increase output in August was widely expected and therefore price remained steady following the decision on July 15. The group’s tapering follows a recovery in demand, but it could be a delicate balance going forward as the cartel tries to manage how much production to bring back over time. OPEC itself currently has nearly 9 MMBbl/d of spare capacity when excluding Iran and Venezuela. Therefore, oil prices are likely to face an uphill battle as demand continues to return if OPEC’s policy is to match demand increases with increases in supply.