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16.07.2020 11:28 AM
Oil resumes decline

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The price of crude oil halted growth on Thursday and again turned to a negative correction, just as experts warned. Although Wednesday's rise became quite significant (raw materials could increase more than 2% at once), today these indicators can be completely leveled. On the eve of the markets, the statistics on black gold reserves in the United States of America were rather enthusiastically accepted, and today's fall ensured OPEC's decision to continue the deal to reduce production along the intended path. And this means that in the coming month there will be an increase in oil production, which so confuses investors in the market.

However, OPEC counted completely differently. According to the conclusion of the organizing committee, the demand for oil raw materials has already recovered quite well and is rapidly continuing to do so further. And this means that there is no apparent reason not to fulfill previously assumed obligations under the agreement on the reduction of oil production. According to the contract, in August of this year, countries can increase production by 2 million barrels per day.

It should be noted that the main content of the agreement includes clauses whereby the countries that signed it undertake to reduce their production of raw materials by 9.7 million barrels per day for the months of May and June. This should be followed by some easing of stringent measures and an increase in production by 2 barrels per day. However, OPEC decided to leave it as it is until the next meeting, which took place on Wednesday. In general, by the spring of next year, production should gradually recover, and its mandatory reduction is planned within 5.7 million barrels per day.

At the OPEC committee of ministers meeting in June, there were too many reasons to keep the decline at the toughest level, as oil prices continued to balance in the red zone, and demand showed almost no improvement. Therefore, in July, it was decided to leave the production restrictions in the form in which they were originally adopted. Now the situation has changed dramatically, and we can say that the market has formed a shortage of raw materials, which, however, is not so noticeable against the background of the coronavirus pandemic.

However, the OPEC meeting did not go smoothly. The countries have been given the strict condition that everyone should fully fulfill their obligations under the agreement, and compensate the arrears in the very near future. Otherwise, the contract will be terminated. The Cabinet of Ministers received an order to carry out monthly strict control not only over the situation on the raw materials market but also over countries on the progress in fulfilling the terms of the contract.

Cabinet co-chairs came to the general conclusion that the demand for raw materials has recently looked very good as it is recovering quite quickly. However, there are still concerns about its further growth, still amid the threat of a second wave of the COVID-19 pandemic. Currently, there are no serious threats that could prevent countries from increasing their production. However, the issue of compensation for outstanding previous obligations under the transaction is very acute.

In May of this year, states were able to fulfill their obligations by only 89%. The total amount of oil that has not been reduced is 1 million barrels per day. In the first month of summer, the contract was already 95% fulfilled, and the surplus in the raw materials market was in the region of 485 thousand barrels per day. Thus, in the two months of the existence of the contract, approximately 1.5 million barrels per day of excess raw materials were delivered to the market.

For those who have not fully fulfilled their obligations, sanctions are beginning to take effect, which implies an additional reduction in production in the coming month. Thus, OPEC member countries that have not reached the level of reduction required by the agreement will have to close the valve an additional 1.3 million barrels per day next month to compensate for the so-called failure. Some of these countries are Angola, Gabon, Iraq, Congo, and Nigeria. Meanwhile, countries that are not members of the organization were silent at the meeting, noting only one malicious violator which is Kazakhstan.

OPEC issued recommendations to violating countries to reduce production in August and September by another 842 thousand barrels per day. Iraq has already partially agreed to the terms and conditions and indicated that it plans to compensate about 700 thousand barrels per day this month, and another 314 thousand barrels per day in the next two months. At the same time, all debtors, without exception, are instructed to send debt compensation schedules by the end of the month to reduce production, so that the next OPEC meeting could draw the appropriate conclusions and take action in time.

The next meeting is scheduled to be held on August 18. If the situation on the raw materials market begins to deteriorate rapidly, ministers can hold an unscheduled emergency meeting and adjust their actions to stabilize the recovery process. So, among other dangers, the question of the second wave of coronavirus infection and the subsequent new restrictive quarantine measures that can significantly aggravate the situation on the oil market, as it happened in the first wave, is an acute question. So far, the situation has not worsened enough to take urgent measures, although this uncertainty is already quite seriously putting pressure on market participants.

The price of futures contracts for Brent crude oil for delivery in September on the trading floor in London fell by 0.64% or $0.28, which moved it to the level of $43.51 per barrel. Wednesday's trading ended on a positive note at a significant increase of 2.2% or $0.89, and the price stopped at around $43.79 per barrel.

The price of futures contracts for WTI light crude oil for delivery in August at the electronic trading platform in New York also underwent a negative correction, which amounted to 0.83% or $0.34. Its current level so far continues to remain slightly above the strategically important value of $ 40 per barrel which is located within $ 40.86 per barrel. By the end of the trading session on Wednesday, the price of the WTI black gold was able to rise by 2.26% or $0.91, which sent it to the mark of $41.2 per barrel.

Maria Shablon,
Analytical expert of InstaForex
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