Oil climbed in London following a sixth weekly increase after OPEC and its allies agreed to extend production curbs, although skepticism the cartel would be able to ensure full compliance tempered the gains.
Brent futures rose 1.2% after swinging between gains and losses earlier. OPEC+ will prolong its historic curbs for an extra month and while the group cajoled Iraq, Nigeria and others to fulfill their promises to reduce production, concerns remain about the laggards sticking to their pledge. Libya, which is exempt to the cuts due to its civil war, is also returning supply to the market just as demand rebounds following the easing of lockdowns.
“The issue of compliance is a major fault line in OPEC+ now,” said Vandana Hari, founder of energy consultancy Vanda Insights in Singapore. “Crude had mostly priced in the one-month extension of deeper cuts by Friday.”
Oil has doubled since April as OPEC+ cuts trimmed a global glut and demand staged a rebound after the easing of restrictions in some countries, particularly China. Still, a sustained recovery may be hampered by deteriorating relations between Washington and Beijing, a second wave of infections, or returning U.S. shale supply following a gain in crude prices.
The extension is a victory for Saudi Arabia and Russia, which were deadlocked in a price war just two months ago. OPEC+ agreed to cut output by 9.6 million barrels a day in July, 100,000 barrels a day less than this month as Mexico will end its constraints. Any member that doesn’t implement 100% of its curbs in May and June will make extra cuts from July to September to compensate.
“The only potential Achilles heel, in what seemingly is an expected extension of current deep cuts through July, is the caveat of sub-compliant members requirement to compensate for lack of compliance,” Bjornar Tonhaugen, head of oil markets at Rystad Energy, said in a note. “Countries such as Iraq and Nigeria will struggle, we believe, to compensate fully, which puts increased pressure on the coherence of the alliance.”
Following the extension to supply cuts, Saudi Arabia made some of the biggest increases to the price of its crude, with the steepest hitting July exports to Asia. The month-on-month boost to its flagship Arab Light to Asia, which accounts for more than half of Saudi oil sales, is the largest in at least 20 years. Overall, the gains erased almost all of the discounts the kingdom made during its brief price war with Russia.
Meanwhile, Libya’s biggest oilfield is gradually resuming production after a five-month shutdown due to civil war. Output will start at an initial 30,000 barrels a day at Sharara and it will take three months to return to full capacity, according to National Oil Corp. It was pumping about 300,000 barrels a day before the shutdown.
In the U.S. Gulf of Mexico, offshore drillers idled about a third of oil production, amounting to about 636,000 barrels of daily output, due to Tropical Storm Cristobal, according to the Bureau of Safety and Environmental Enforcement. The storm has crossed the coast.