Oil prices inch higher, 1-month supply cut extension falls short of market hopes

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Reuters
KEY POINTS
  • Brent crude had climbed as high as $43.41 a barrel but by 0239 GMT was trading up just 21 cents, or 0.5%, at $42.51.
  • U.S. West Texas Intermediate (WTI) crude rose 2 cents, or 0.05%, to $39.57 a barrel, after earlier touching $40.44 earlier.
An offshore oil platform is seen with a tanker in the distance on April 20, 2020 in Huntington Beach, California.
An offshore oil platform is seen with a tanker in the distance on April 20, 2020 in Huntington Beach, California.
Michael Heiman | Getty Images

Oil crept higher on Monday, but gave up big early gains as optimism over major crude producers’ deal to extend record output cuts gave way to disappointment that the accord didn’t extend beyond the end of July.

Brent crude had climbed as high as $43.41 a barrel but by 0239 GMT was trading up just 21 cents, or 0.5%, at $42.51. U.S. West Texas Intermediate (WTI) crude rose 2 cents, or 0.05%, to $39.57 a barrel, after earlier touching $40.44 earlier. Both hit their highest since March 6.

Since the start of April Brent has nearly doubled, propped up by the unprecedented production cut of 9.7 million barrels per day — nearly 10% of global supplies — agreed in April by the Organization of the Petroleum Exporting Countries (OPEC), Russia and other allies, collectively known as OPEC+.

On Saturday OPEC+ agreed to extend the deal by a third month through end-July. Following the deal, world’s top exporter Saudi Arabia sharply raised its monthly crude prices for July.

But Howie Lee, economist at Singapore bank OCBC, said the one-month extension had fallen short of market hopes for a three-month deal. He said both benchmarks would require stronger bullish factors to propel prices back to where they were before March 6, when prices crashed after OPEC and Russia initially failed to reach an agreement to extend output cuts into April.

“It’s a big gap there. You need a strong conviction to go from $43 to pre-crash levels,” Lee said, referring to Brent being above $50 a barrel before the March crash.

Still, the current deal is expected to lead the market into a supply deficit by October, underpinning prices in the longer run, he added.

Compliance with the agreement among OPEC members such as Iraq and Nigeria also remains an issue.

“While the errant producers such as Iraq and Nigeria have vowed to reach 100% conformity and compensate for prior underperformance, we still think they will likely continue to have some commitment issues over the course of the summer,” said Helima Croft, head of global commodity strategy at RBC Capital Markets.

“The potential return of Libyan output could also cause considerable challenges for the OPEC leadership.”

In southwestern Libya, two major oilfields have reopened after months of a blockade that shut off most of the country’s production.

Even as oil prices recovered, they are still well below the costs of most U.S. shale producers, leading to shutdowns, layoffs and cost-cutting in the world’s largest producer.

The number of operating U.S. oil and natural gas rigs fell to a record low for a fifth week in a row in the week to June 5, according to data from Baker Hughes.

Nearly 30% of U.S. offshore oil output was also shut on Friday as tropical storm Cristobal entered the Gulf of Mexico.

Higher oil prices could invite the reinstatement of supply, notably U.S. shale, that was planned to be shut-in in June and July, BNP Paribas’ Harry Tchilingurian said.

“OPEC+ faces a catch-22 situation,” he said. “The resumption of output … may moderate the pace of rebalancing of the oil market.”