Brent Crude’s oversupply weaknesses need to be addressed in order for it to break through the trend of between $40 and $50 per barrel, says Thom Payne, a director at Westwood Global Energy Group.
The OPEC+ organization recently agreed to extend the crude supply cut until end of July but that is not enough as Brent Crude hopes for a complete oil prices rebound.
The alliance of OPEC and other oil-producing countries and firms have resulted in oil production cut by 9.7 million barrels per day at the start of May 1, and the cuts — which have helped push up crude prices in the last two months — was initially set to decline on July 1.
“If you take February to May, you’ve got an average built position, oversupply of 40 million barrels a day. So we’ve effectively built about 2 billion barrels of additional storage,” Payne told energy reporters on Monday.
“We definitely need to drain that before we can see prices move materially above that kind of ($40 to $50) price structure,” Payne added.
His comments came after the group, known collectively as OPEC+, on Saturday agreed to extend its record oil production cut for another month as it seeks to balance the global oil market.
Commenting on the recent OPEC+ agreement, JPMorgan’s Head of Asia Pacific Commodities Research, Scott Darling, said: “I’d take some positives out of this — you’ve got compliance.
“I think you’ve also got now monitoring on a month-by-month basis and it also feels there’s not just near-term views on oil but gradually a sort of longer-term vision around where they want oil to go.”
Oil prices have seen a partial recovery since seeing a plunge in April due to several concerns — ranging from uncertainty over demand due to the coronavirus pandemic that was spreading rapidly, to issues with crude oversupply.
In the afternoon of Asian trading hours on Monday, international benchmark Brent rose 1.49% to trade at $42.93 per barrel.
Similarly, the US crude futures gained 1.34% to trade at $40.08 per barrel.
Looking ahead, Payne from Westwood Global said: “What’s likely to happen is that the oil markets move to a net draw or undersupply position by around July, August of this year.” This would be “very supportive” of the current $40-50 per barrel price range for Brent, he added. That’s assuming that the demand scenario plays out in line with the general consensus and OPEC achieves 100% compliance — a feat Payne admits is “probably a little bit optimistic.”
For his part, Darling said JPMorgan saw Brent at $40 dollar per barrel this year and $47 per barrel for next year.