Oil prices continued advance on Tuesday, Brent gained $2 rising to $43 per barrel, the highest level since early March. Obviously, sentiment in the market remains positive, thanks to the fact that constructive rhetoric from the OPEC, regarding compliance of several participants, has finally appeared.
One of the weak links in the OPEC+ deal is the lack of enforcement mechanism which creates incentives for some participants to deviate.
However, progress on this matter was outlined last week, as individual participants to the agreement began to inform OPEC about how, when and how much they would reduce output. The traditional “hack worker” Iraq and Kazakhstan provided the organization with details of how they would cut output. Nigeria also outlined plans to cap production. Obviously, all this information cements the deal and increases the likelihood that compliance will be high.
Recall that extended version of the OPEC+ deal implies output cap of 9.7 million bpd until the end of July.
Russian energy minister Novak said the $40-50 range is now fair for oil. Although such an oil price is acceptable for the Russian budget, some OPEC members will not be happy if prices stay at this level for a long time (due to the higher oil price set into the budget), so they will probably want more expensive oil. These fundamentally justified disagreements give rise to an interesting situation by the end date of the agreement, as instead of cooperation, a competition may emerge again, pulling producers back into the price war.
Also, API data on US oil reserves are expected today. It is expected that inventories rose 2 million barrels last week. A steady increase in reserves may indicate that low oil prices failed to destroy the US oil sector and it is restoring production along with rising prices.
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