The cooperation of oil producers is key for the future of the oil market

The leaders of the two largest producers of the OPEC + oil cartel agreed on the need to restore balance on the market so that supply can even out the demand. In particular, attention is focused on the other signatories to the agreement, who in some cases have failed to reduce production sufficiently. Should this happen, this could lead to oil overwhelming its slowing demand due to growing cases of restrictions. The key will be the beginning of the next year when OPEC plans to approve production cuts. 

 

OPEC must cooperate

In the phone call, Putin and Salaman agreed that all members of the OPEC cartel needed to work together and adhere to the original mining restrictions agreements, which would benefit both producers and consumers. Consumer demand has been in jeopardy in recent weeks and may worsen from next year. The reason is, of course, the coronavirus pandemic, which has a negative effect due to the subsequent restrictions imposed by individual countries to prevent the spread of the virus. Most businesses are less active, people are ordered to work from home, and airlines fly even less, all this is reducing demand even more. 

 

In the meantime, a monthly cartel report was published yesterday. According to it, US oil production is recovering much faster than expected. Next year, it still expects a slower recovery in demand, and the market could therefore have difficulty absorbing excess barrels of oil. Another change in production policy is expected to come in January, by which time OPEC will receive 7.7 million barrels less than at the beginning of the year. Countries like Iraq, UAE, and Nigeria are exceeding the amount of oil they should pump into the market and Saudi Arabia is pushing them to compensate for this. However, Russia has gotten more oil on the market since the beginning of production cuts as well.

 

Producers want to sell more oil from next year

This may be a problem especially next year when the cartel is expected to increase production by 2 million barrels per day, which would be greatly supported by renewed production from Libya, which may increase by another 700,000 barrels per day by the end of the year. The other signatories to the agreement also expect their production to grow from next year, mainly due to the fact that the total demand for their oil is said to exceed the supply. The UAE energy minister even said that OPEC plans to increase production by the end of this year. However, the cartel plan may change very quickly depending on the worldwide spread of coronavirus and other restrictions.

 

Chart: WTI Oil - 4H timeframe (Source: PurpleTrading cTrader)