June 1, 2020 12:30 PM, EDT

Uncertainty About OPEC+ Cuts Has Oil Struggling to Sustain Rally

Oil tankers near the Port of Long Beach, Calif., in December 2009.(Bloomberg News)

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OPEC+ and its allies will decide as soon as this week whether to extend their historic output curbs, yet how long and to what extent global production curtailments remain in place will be crucial to sustaining crude’s rally after a record rebound last month.

The Organization of Petroleum Exporting Countries and its allies may bring their next meeting forward to June 4 to discuss prolonging production curbs by one to three months, according to a delegate. The existing agreement calls for easing cuts from July, a plan Russia would prefer to stick to. Meanwhile, in the U.S., the oil-drilling fleet shrank for the 11th week to a level not seen since before the shale revolution. While North American shut-ins have peaked, according to Bank of America, U.S. imports of Saudi crude have surged, inflating inventories.

American stockpiles are “probably heading higher at least in the short term as more imports come in,” said Peter McNally, global lead for industrials, materials and energy at Third Bridge. “The market is oversupplied to begin with. Everyone is looking for more signs of demand firming.”

Up to this point, the production curbs have been effective. Crude rallied almost 90% last month, a record gain, as shrinking supplies helped to offset pandemic-related demand losses. Yet the rally depends on producers maintaining cuts until the crude surplus that has poured into the world’s storage tanks is mopped up. Higher prices could tempt producers to turn back on the taps, undercutting gains.

West Texas Intermediate for July delivery fell as much as 3.4% June 1 to $34.27, after advancing 5.3% on May 29. The U.S. benchmark crude pared losses to trade at $34.85 as of 10:25 a.m. in New York. Global benchmark Brent crude for August slipped 10 cents to $37.74.

An earlier OPEC+ meeting would give the producer group more flexibility to change its current production limits as members usually decide their plans for shipping oil for July in the first week of June. The group’s preference is to take short-term measures on cuts as the situation is changing quickly, the delegate said. The coalition — which includes OPEC’s 13 members plus another 10 exporters — has achieved 92% compliance, according to an estimate by data analytics firm Kpler.

Meanwhile, the U.S. Oil Fund ETF will begin its monthly roll of futures contracts June 1. The fund plans to sell its July holdings and buy more November and January futures over the next 10 trading sessions.

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