Scraping the Barrel
Brent recovered from session lows and is anchored to $40 per barrel into the New York session close, but traders are still waiting for clarification on an OPEC free-rider dispute. The primary point of contention is centered on Iraq and Nigeria's long-standing non-compliance to virtually all OPEC+ production deals as Russia and Saudi are right to take steps to ensure the burden of cuts is distributed equitably.
Whether this dispute should have made its way into the public domain is another question. It would’ve been far more suitable from a price perspective to present a unified front and have the free-rider dust-up during the video call to avoid the perception that tensions are emerging within the group.
Despite the volumes of ink being spilled, the free-rider story has failed to move the needle to any significant degree, suggesting the market remains confident that any difficulties will be resolved by the time the meeting takes place. Still, with Brent unable to make significant headroom above $40 overnight, this new element of uncertainty appears to be temporarily holding bulls at bay.
Conspicuously, the free-rider clampdown story was leaked just after EOG and Parsley Energy flagged earlier in the week they were preparing to restore shut-in production in the wake of the sharp rally in WTI. Indeed, the razor-sharp oil price recovery might very well have raised some concerns among OPEC+ producers that highly reactive and price sensitive US producers will turn on the taps quickly and eat into the OPEC+ share of the pie.
The markets remain confident that Saudi Arabia and Russia will see eye-to-eye, and Iraq and Nigeria will provide the necessary lip service to breach this low bar to a production cut extension. So the critical risk for markets from here will be how US shale producers respond to the rebound in oil prices.
Going forward, however, for the market concerns it’s essential that OPEC+ maintains focus on the factors they can control as the next meeting draws closer, which is merely confirming the supply extension.
The running headline narrative
It’s the usual pre-OPEC+ meeting headline mill.
Crude traded back below $40 overnight as the brought-forward OPEC meeting appears to be pushed back to next week amid concerns that other members of the OPEC+ group are not fully complying with their commitments (as per Reuters).
An extension of the May/June quotas, which weren’t within market expectations until a few days ago, may also be in doubt – most recent reports (WSJ) suggest this may be extended for one more month, not two as initially reported. Saudi Arabia is also said to be considering reversing its 'over-compliance' (as per the Financial Times).
Yesterday's US inventory figures emphasized that the crude oil inventory build concerning the market has been curtailed by supply falls, but the builds in production highlight that while demand recovery has begun, it’s at a very early stage and could take some heat out of any price recovery given the prophets of doom who think every asset is running ahead of the fundamental.
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