Weekly Preview: Risks and rewards in the new OPEC+ deal
Welcome to the daily brief. The world oil podcast network daily review of Market News, emerging trends, new technologies and the people who are advancing the oil and gas industry. Here's Cameron. Wallace with your top news stories of the day. Hello and welcome to the world oil. Daily, brief podcast I'm Cameron Wallace and today is Sunday June seventh. Yesterday the OPEC Plus Alliance ratified its agreement to extend oil production cuts through the end of July. That agreement has a lot of moving parts and relies on strict compliance countries that don't have a very good track record of hearing quotas. The deal also represents a new more sophisticated approach by the cartel to proactively control oil prices, and not to spoil the surprise, but they may have finally hit upon way to keep us shale producers in check as part of it. Regardless Saturday's activity will have an outsized impact on the oil and gas industry this week. Before we get started with that. Take a quick look at the week. That was. Baker Hughes updated its drilling rig count. Friday and we continue to see those numbers reflect capex budget cuts and weaken global demand. The US Land Rig. Count stood at two hundred eighty four rigs on Friday down seventeen rigs for the week and down six hundred ninety one rigs compared to this day one year ago. Meanwhile, Canada has added one rig, bringing their total to twenty one and the international rig count fell by one hundred and ten rigs to eight hundred five. Amid falling rid counts, oil prices log their six week of price gains. Thanks to OPEC and continuing Chinese demand growth West Texas intermediate closed the week up two dollars and fourteen cents to thirty, nine, fifty, five, a barrel while Brent closed up two dollars and thirty one cents to forty two thirty barrel. So now as we look forward to coming week, let's take a little deeper look at the OPEC plus agreement. There's a lot more to it than just tacking thirty days onto the schedule has some significant implications for both members and non members. Yesterday OPEC plus agreed to a one month extension of its record oil production cuts and adopted a stricter approach to ensuring members. Don't pump more than they pledged. The deal will underpin all markets recovery easing the financial pain felt by resource, dependent emerging economies show explorers in Texas and blue operators alike. According to consultant would Mackenzie Brent. Crude prices could rise to as much as fifty dollars a barrel this week. It's a victory for Arabian. Russia who put a destructive price for behind him to cajole Iraq Nigeria and other laggards to the filler promises to cut production. The two leaders of OPEC plus show that they intend to keep a close watch on the oil market. The group's monitoring committee will now meet every month to assess the balance between supply and demand amid certain economic recovery from the global pandemic. Saudi, Energy Minister Prince Abdulaziz Bin Salman said our collective efforts have borne fruit, and despite many uncertainties, there are encouraging signs that we are over the worst. Demand is returning as big oil. Consuming economies emerged from pandemic lockdown. After a video conference lasting several hours on Saturday delegates said that all nations had signed off on a new deal for production cut of nine point six million barrels a day next month. That's one hundred thousand barrels a day lower than the reduction in June because Mexico will end its supply constraints, but a tighter limit than the seven point, seven million barrels a day set for July in the group's previous agreement. In addition any member that doesn't implement all its production cuts in May and June will make extra reductions from July to September to compensate according to an OPEC communique. Those promises are a particular indication for the Saudi minister who has consistently pushed fellow members to stop cheating on their quotas since his appointment last year. But they could also add to risk in theory. The entirety of the twenty three nation production agreement, which runs until April, twenty, twenty two is now contingent on every member, making one hundred percent of their pledge cuts. That something that's rarely achieved in the three and a half years at places existed or indeed also the decades long history of the Organization of Petroleum Exporting Countries itself. Oil has just posted a sixth weekly gain in London more than doubling since April with traders, anticipating tighter supplies as demand recovers from lockdowns. US, president, Donald, trump on Friday hailed the cuts OPEC allies for saving America's energy industry. US Energy Secretary Denver. Yet also welcomed the deal on Saturday. Saying quote I applaud the OPEC plus for reaching an important agreement which comes at a pivotal time as oil continues to recover and economies reopen around the world. Russia's Energy Minister Alexander Novak said in opening remarks at the meeting. The oil market is still in a fragile state needs support that is why this meetings more than ever is important to adhere to one hundred percent compliance. The group hopes to build on its success by pushing the market into supply deficit next month, taking advantage of a price structure called backwardation to chip away at the billion barrel of oil stockpiles, the built up during the pandemic. There was no discussion at the meeting about the future of the additional one point, two million barrels a day, voluntary cuts being implemented by Saudi Arabia and its Gulf allies in June. The cartel meet again in the second half of June for another review, the oil market. Talks are scheduled on June. Eighteenth for the Joint Ministerial Monitoring Committee which could recommend a further extension if it's deem necessary, which would push the production cuts into August? That panel is set to meet every month until December. The next full ministerial OPEC plus meeting has been scheduled for November thirtieth to December the first, although the communique notes, that conference could be held whenever it is required. Cutting production is always painful for oil-dependent states Iraq in particular needs every penny, because it's still rebuilding its economy, following decades of war sanctions and Islamist insurgency. The country amid listen half of its assigned cutbacks last month, so compensating fully would require to slash production by a further twenty four percent to three point, two eight million barrels a day. Accepting such could risk of backlash from Iraqi parliamentarians and political parties not want to bow to foreign pressure. The traditional shirkers, and plus promise many times before to do better, but some some analysts are skeptical that it'll be any different this time. There's also a risk that future OPEC plus curbs could be undermined by return of Libyan oil. The civil war there halted more than one million barrels a day production, helping pick plus rebels the market. But a ceasefire on Saturday, now opens the door for gradual recovery of supply. For now at least members of OPEC, plus can enjoy the price gains resulting from the deal. The oil mark is on its way to recovery, said Ann Lewis Hill an oil analyst of wood, Mackenzie supply shifted dramatically already. Global demand is recovering to with both May and June climbing from the lowest seen in April as the coronavirus, related shutdowns continue to ease. Now on the surface. This agreement might look like more of the same old plus strategy of cutting production. But a closer look shows subtle changes that point of Saudi Arabia Russia and their OPEC plus allies adopting a more sophisticated approach. That being trying to flip the shape of the oil price curve upside down. In many respects, the cartels borrowing from playbook of the world's top central banks or policymakers often focus on interplay between long and short term investment rates. The alliance's traditionally targeted a reduction in inventories, but now it's also actively focusing not just on stockpiles, but also on the shape of the oil curve, designing policy to influence short term prices relative to those further in the future. The idea within OPEC plus is trying to push near-term or spot prices higher than forward contracts structure known among traders as backwardation. In short OPEC wants oil today to be more sought after than oil for delivery months or years into the future encouraging refiners and traders to take root out of inventories. This marked a departure from previous aims to draw down inventory, more subtle way of communicating in. The shift first reported by Bloomberg on Friday could have important implications for US shale producers who benefit from higher longer dated prices as they used them to hedge their future production. While front month West Texas intermediate remains slightly below forty dollars a barrel. The price of twenty twenty one is trading higher and the price for twenty twenty two is almost forty to fifty a barrel. Brent price curve remains in tango. The term for market where long-term oil is more expensive than short. Although earlier this week, the front of the curve briefly flipped into backwardation. This price difference between contracts for delivery now and in six months remains in tango although it has narrowed significantly over the last two months. Controlling the shape of the curve is difficult, would require OPEC plus to make short-term adjustments to its output, reacting quickly to changes in supply and demand. But there are signs. OPEC pluses adopting more nuanced policy approach, extending his deep output cuts by a single month rather than committing to a longer period. For the OPEC. Plus Alliance, the ideal scenario would be to move the shape of the curve from his current tango, where near prices are lower than future prices into a mild backwardation was spot prices higher than forward ones. Cartels Preferences Shallow backwardation about twenty to thirty cents per barrel per month right now. The West Texas Intermediate is on a Mild Tango fifteen to twenty cents per barrel per month. Damian on an oil analyst at Goldman Sachs, so we believe that OPEC remains focused on sustainably increasing revenues through a combination of higher prices, but also higher market share. Structurally this conference us in our long held view that OPEC will start targeting backwardation rather than higher prices alone. Finally today. In case we needed any reminders of the risks that face the OPEC plus producers. Libya's biggest oilfield is gradually resuming production after a five-month shutdown as regional powers push to end the country's civil war. The restart the Shahara field in the southwest comes after lengthy negotiations with militants to reopen valve closed in January, the state. Run National. Corporation said on Sunday. Production will resume at initial thirty thousand barrels per day and take three months to return to full capacity due to damage caused by the shutdown. Shahara was using three hundred thousand barrels a day before the cut-off amid an offensive by Khalifa half Dr who leads a rebel military force base in the countries east. The field resumption follow setbacks in recent weeks for half tires forces. They've lost stronghold in western Libya after battling for more than a year to seize the capital Tripoli from the United. Nations back government of Faez L. Suraj. Halftime had accepted an Egyptian sponsored. Cease Fire over the weekend, although Sarraj is, administration said Sunday is fighters will continue their offensive to retake two key cities before any political negotiations. After. Supporters have blockaded major oilfields imports since January cutting output in the north African nation from as much as one point, two million barrels a day to just ninety thousand barrels. Libya Africa's largest proven crude reserves and the collapse production has had the inadvertent effect of helping the OPEC plus alliance prop up oil prices, following the route of March and April. And there you have it a closer. Look at the OPEC plus production agreement that will be the prime mover of oil and gas industry activity this week. To learn more, please visit, world, oil dot com slash news. I'm Cameron Wallace thanks for listening today. Thanks for listening to the daily brief on the world oral podcast network. If you have any questions or comments on the program, please email editorial at world, oil, dot, com, and check. The show notes for more information about today's episode. Don't forget to subscribe either on Apple. PODCASTS or wherever you get your podcast, also be sure to visit world dot com for more information about today stories and sign up for our free daily newsletter.