With oil prices roaring back, the OPEC+
output cuts are undoubtedly doing their job.

But they’re due to be reviewed in a little
over a week, and the unwieldy group needs to ensure the fault lines between its
de facto leaders, Saudi Arabia and Russia, don’t resurface. We all know what
happened last time they couldn’t agree on the way forward.

For now, the results of the collaboration
are almost too good to be true. In the first month of execution, the level of
compliance achieved by most of the 20 countries that signed up to the deal has
been astonishingly good. That may be a sign of their desperation as crude
prices plunged below zero, or a reflection of the struggle to sell cargoes in a
world where demand has collapsed.

Perhaps not surprisingly, countries outside
the deal have played their parts too, as economic forces drove oil companies to
slash output. But the extent of the moves are eye-popping. Weekly data show US
production down by 1.6 million barrels a day, or 12{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2}, in two months. The real
drop may be even bigger, as the Energy Information Administration can only make
its supply and demand estimates balance with a -999,000 barrel-a-day “adjustment
factor.”

That’s the biggest negative
potential-adjustment number ever and at least some of it is almost certainly an
overestimation of production. In Canada, production in Alberta has fallen by a
quarter, or 1 million barrels a day.

Things are definitely moving in the right
direction, but the question is how producers should respond. The view from the
Moscow office of Russian Energy Minister Alexander Novak is that all of the
output cuts, combined with recovering Chinese oil demand, will bring global
supply and demand back into balance in June or July.

That may be glossing over the details a
little too quickly. It’s really too soon for producers to relax. The demand
recovery has yet to take hold in the US or Europe, or in much of Asia beyond
China. Fuel consumption in India is currently about 40{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} below last year’s
levels, while in the US, a surprise second dip in demand in last week’s data
means it remains about 25{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} lower than at the same point last year.

Producers should keep this in mind as they
prepare to meet again in another series of virtual gatherings on June 9 and 10,
to assess the effectiveness of the output deal and confirm their next steps.

They’ll have plenty to celebrate, not least
the recovery in oil prices.

They need to exercise caution, though. The
temptation to begin raising production is all too seductive, but the recovery
in oil prices should not be taken as a license to open the taps — especially
since it’s being helped by the extracurricular efforts of some in group members.

Saudi Arabia and its neighbours decided
earlier this month to make additional output cuts in June, beyond those already
agreed. That could take another 1.2 million barrels a day off the market and
send Saudi Arabia’s oil production as low as 7.5 million barrels a day next
month, a level not seen for 20 years, except in the immediate aftermath of the
attacks on Saudi oil processing plants last year. 

Still, some in the OPEC+ group, most
noticeably Russia, are eager to stick to the deal they agreed to in April and
to begin reopening the taps at the start of July. A challenge for OPEC+ is that
it has every right to do so. Their hard-fought deal has built-in sunset clauses
that allow participants to start easing their restraint in July. If they do,
that could trigger the rapid return of anywhere between 2 million and nearly 4
million barrels a day of oil supply.

Luckily other participants seem more
cautious, and Saudi Arabia, Kuwait and the United Arab Emirates may be among
them. One idea that has been floated is to revise April’s agreement and extend
the May-June production targets all the way to the end of the year. It’s a
suggestion that hasn’t found favour in Moscow.

But Saudi Arabia and Russia — the group’s
biggest producers by a large margin — appear to be trying to avoid another
conflict. For this coming round, the two countries agreed to closely coordinate
during a phone call between Russian President Vladimir Putin and Saudi Crown
Prince Mohammed Bin Salman last week. They have held similar talks before
previous OPEC+ meetings.

But it wasn’t so long ago that Russia’s
refusal to accept deeper output cuts being pushed by Saudi Arabia led to the
collapse of talks altogether and triggered the market-share battle that saw the
kingdom boost production above 12 million barrels a day — and we all know how
that ended, with storage being filled to near capacity and the lowest oil
prices in 20 years.

After April’s hard-won deal, it’s up to the
OPEC+ group to make sure it’s not a short-lived success story now that the
imminent threat of collapsing oil prices has receded. 

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