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$40 Oil Is The New Normal

Oil prices are set to fluctuate around the $40 mark for the foreseeable future as there is too much downside risk for them to move much higherAll eyes should be on Iraq this week as it puts forward a plan to achieve full compliance to the OPEC+ deal If OPEC+ countries fail to comply or if a second wave of lockdowns takes place we can expect prices to nosedive

Oil prices have already reached an interim stage of recovery. The 40-dollar mark is the level around which they will fluctuate for a while, but huge deviations are not likely.

Further gains or 45-50 dollars would not be justified at this stage despite the supply curtailments as there are still valid concerns on the demand side.

The pandemic has not disappeared, it’s tiring for many to refer to Covid-19 again and again, but the reality demands it. Infections are rising in key markets around the world and there are valid concerns that the world is in for a prolonged period of dealing with its consequences.

If infections and hospitalizations rise even more and a second wave becomes a reality, the market will get depressed again with demand declining. Not as much as in the first half of the year though, as the extent of lockdowns that we have experienced was too painful to bear for many countries.

Prices today do not have a clear common direction and largely fluctuate around their last week’s closing levels. The risk of an upsurge in coronavirus cases is omnipresent, with the WHO reporting the largest single-day increase in cases to-date, at more than 183,000 in the latest 24 hours.

The Saudi Oil Minister and Russia’s energy minister are both talking up the market rebalancing and the current recovery in oil consumption, but that will entirely depend upon avoiding a second round of serious lockdowns.

Meanwhile, today is D-day for Iraq, one of the sub-compliers in the OPEC+ agreement. Today, Iraq must present its plan to get production down in line with the target cuts of 1,061,000 bpd in July, and present a plan to compensate for the lack of compliance in May and June for the next three months.

That could even mean producing below the target for those months in OPEC’s compensation clause from the latest communique.

The reason this is important is not that the extra 500,000 bpd or so of production cuts from Iraq would make a huge difference for prices, but the OPEC+ agreement in itself is on the line here. Patience by Riyadh and Moscow is running thin, and the market will be watching the reactions to Iraq’s plans in the coming days.

If OPEC+ sees that it cannot trust the members of the alliance, it cannot be taken for granted that the deal will be maintained. What if it get scrapped?

The production cut levels we have now are unprecedented and the possibility of them being removed immediately and the market being once again flooded with oil could send prices tumbling again.

Compliance is the keyword this week, and most eyes will be on the plans put forward by the OPEC+ countries that are currently falling short.

If demand remains stable and the compliance plans that are put on the table are trustworthy and commitments are kept, we can expect prices to move between 40 and 45 before the next OPEC+ meeting, which will be another benchmark event.