Oil rallies above $40 as markets rebalance

Brent at 3-month high on hopes of Opec+ extending output cuts

Oil prices continued to move upwards yesterday with Brent trading above $40 (Dh146.8) for the first time in three months, as oil markets reacted positively to reports on Opec+ possibly extending their production cuts.

Prices have already been steadily rising for the last month as global economies reopen from lockdowns along with production cuts of almost 10 million barrels per day (bpd) by Opec+. Both benchmarks of Brent and West Texas Intermediate have now seen prices end on five consecutive weekly highs.

“Opec+ is debating whether the deep level of cuts that were due to be in place for just May — June 2020 should be extended to keep inventories from widening out even mor. The sharp improvement in spot prices in the past month may encourage Opec+ to keep deep cuts in place,” said Edward Bell, commodity analyst at Emirates NBD.

Outlook

“Were Opec members to extend the deeper cuts until the end of August the implications for oil output from the GCC economies would be sharp.

Based on the Opec+ agreement, Saudi production is set to decline by nearly 5 per cent year-on-year in 2020 but cutting deeper for longer would push the trajectory to a near 8 per cent drop,” he added.

Bell noted that should production cuts be extended, oil prices would likely find support in the same current price range.

“We are hesitant though to assign much chance that prices would improve considerably beyond their current range.”