Oil Analyst Expects Deeper Deficit In Q3, Says Demand Will Not Fully Recover Until 2022

Oil futures were trading higher Monday after the Organization of Petroleum Exporting Countries and its allies met by videoconference call on Saturday and agreed to extend the 9.7-million-barrel-per-day production cuts through July.

Capital Economics says the Saturday conference was relatively short and amicable, reflecting the fact that Saudi Arabia had been working behind the scenes to broker a deal ahead of time. 

Oil prices have rallied strongly in recent weeks. The caution from OPEC+ reflects the still-high level of uncertainty surrounding prospects for oil demand.

Expect Deeper Deficit In Q3: With the OPEC+ developments factored into global supply forecasts, Capital Economics chief commodities analyst Caroline Bain says in a note that she expects the oil market to fall into a somewhat deeper deficit in the third quarter.

“By then, the easing of quarantine restrictions should be giving a lift to demand. However, our forecasts assume that the aforementioned compensatory cuts are made given that Saudi Arabia has made it clear that it is unwilling to tolerate non-compliance. That said, this may prove to be optimistic,” the analyst says. 

While a deficit in the market should be positive for prices, global stocks are now markedly higher than they were at the start of 2020, she says. 

Capital Economics is not expecting global demand to return to its pre-crisis level until at least 2022. As a result, stocks will remain high, acting as a lid on prices, Bain says. 

Oil Gains, Demand Ticking Higher: The price of Brent crude was trading higher Monday.

“Brent crude is so far only gaining 1.5% today (8 June) to $42.9/bl because most of the news from the OPEC+ deal this weekend (6-7 June) was widely known on Friday (5 June), but we think there is more upside price action to come,” Bjarne Schieldrop, chief commodities analyst at SEB, says in a note.

The demand for Brent crude is ticking higher, and OPEC+ is holding deep cuts for July and probably also for August if needed, the analyst says. 

OPEC+ has become much more nimble and light on its feet, he says.

“It [OPEC+] will cut deep in the short term and create prompt tightness, with the very front-end of the Brent crude curve now starting to move into backwardation, but it gives fewer assurances for the future,” adds Schieldrop.

Price Action: Exxon Mobil Corporation XOM shares were up 1.69% at $54.03 at the time of publication Monday. The stock has a 52-week high of $77.92 and a 52-week low of $30.11.

Marathon Oil Corporation MRO shares were up 10.72% at $8.10 on Monday during the time of publication. The stock has a 52-week high of $14.70 and a 52-week low of $3.02.

Occidental Petroleum Corp. OXY shares were up 8.56% at $22.57. The stock has a 52-week high of $54.05 and a 52-week low of $9.

Chesapeake Energy Corporation CHK shares were up 134.56% at $58.17. The stock has a 52-week high of $430 and a 52-week low of $7.77.

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