OPEC and its allies need to find a balance between supporting oil prices and keeping U.S. crude production at bay, a strategist told CNBC this week as the oil-producing group starts to roll back supply cuts.
The alliance’s historic production cuts of 9.7 million barrels per day expired on July 31 this year. From August, the cuts will be tapered to 7.7 million bpd.
Oil prices fell on Monday due to oversupply concerns, Reuters reported, noting that oil output already increased by 1 million bpd in July when Gulf countries ended their voluntary extra supply curbs.
“I think we’re witnessing kind of a high-wire … balancing act that OPEC+ is trying to execute here,” said John Driscoll, chief strategist at JTD Energy Services.
OPEC+ in April made a deal to reduce supply to the market in a bid to support prices, which went into a “free fall” earlier this year amid demand destruction due to the coronavirus and a price war between Russia and Saudi Arabia.
“Now they’ve restored the balance, prices have recovered, but they have to be very careful because they don’t want to be the victim of their own success,” he told CNBC’s “Capital Connection” on Monday.
“If prices were to zoom past $45 a barrel, $50 a barrel on the back of these cuts, that may be waving the red cape in front of the U.S. independents, the producers,” he added.
U.S. West Texas Intermediate crude futures were down 1.22% at $39.78 a barrel during Asia’s afternoon trade, while Brent crude was down 0.94% at $43.11 a barrel.
“The way I see it, this is a very delicate, fragile balancing act and there’s this cloud of uncertainty overhanging all of it, on the pace of the recovery,” Driscoll said.
He noted that it is difficult to predict how quickly the economy can recover.
“We’re kind of flying blind, but trying to find this magical mean to use to keep U.S. production at bay and to also support prices.”
Driscoll also said he’s “very skeptical” about where oil demand is going to come from, given that travel plans are still getting scrapped during the summer holiday.
“It’s hard for me to imagine anything approaching a rosy scenario on demand recovery when you look at those blighted sectors like commercial aviation,” he said. He sees it happening “very gradually” and being subject to factors such as vaccine development and new surges in virus cases.
“There’s a lot of uncertainty out there,” he said. “It makes any kind of precision in forecasting very difficult.”