There is still room for oil prices to rise, or is there?

Crude oil prices could rise from the current $US40 a barrel to the $US45 to $US50-a-barrel range due to the decision by OPEC, Russia and other major oil producing countries to extend a 9.7-million-barrel-per-day (MMbpd) production cut to the end of July.

Wood Mackenzie says the production cuts by OPEC+ were already working and that extending them an extra month will serve to tighten the market more quickly.

“In Wood Mackenzie’s view, the fundamentals show the oil market is recovering from March’s price shock,” Macro Oils vice president Ann-Louise Hittle said.

“Supply has shifted dramatically, with total world supply on average for the second quarter down by a steep 6MMbpd from the first quarter of 2020.”

Hittle noted that global demand was already recovering, with both May and June witnessing an increase from the low seen in April as COVID-19 shutdowns continued to ease.

“Wood Mackenzie already expected the supply and demand balance to tighten in the third quarter. With the extension, this rebalancing will accelerate as the additional 2MMbpd is kept out of the market for longer,” she said.

“We project world oil demand to surpass global supply and global oil storage levels to begin to draw down in the third quarter, putting upward pressure on oil prices.”

The global resources consultancy forecast that oil demand in the third quarter of 2020 is expected to be 10MMbpd higher than it was in the second quarter, though this is still down 4MMbpd than the same quarter the previous year.

“Our forecast assumes that the global shutdowns continue to ease. Should a second wave of the coronavirus pandemic emerge, the picture will undoubtedly change,” Hittle warned.

READ: BP to cut 10,000 jobs due to weak oil prices, outlook

OPEC+ was originally scheduled to reduce production cuts to 7.7MMbpd from July to December and to 5.8MMbpd from January 2021 to the end of April 2022.

Business intelligence provider Rystad Energy believes that the extension of the OPEC+ cuts and forced oil production shutdowns are deep enough to create a monthly deficit starting from June and continuing uninterrupted until at least the end of next year.

It said the oversupply that sent the West Texas Intermediate into negative territory ealier this year is now a thing of the past, with June expected to have a production deficit of about 1.5MMbpd and peak at 5.2MMbpd in January 2021.

“We believe OPEC+ is attempting to create a mini-bull-cycle by quickly tightening the prompt market, helping depressed prices and creating a supply environment that will facilitate a rapid relief of oil storages, as deficits will trigger large stock draw,” Rystad head of oil markets Bjørnar Tonhaugen said.

“However, if the oil price continues its steady ascension, this will spur reactivation of parts of the curtailed US oil production. Also, if frac crews end their holidays early, US volumes may be coming back more quickly than OPEC+ expects, bridging part of the deficit.”

But Goldman Sachs has a dissenting opinion, noting that despite the recent rally in crude oil prices, it was hesitant to “recommend a long position this early in the cycle”.

“With oil now above $US40 per barrel, supplies will be incentivised to return, but we believe the risks to the downside have increased substantially and are now looking for a 15-20 per cent correction which may already be underway after Monday’s modest sell-off,” the investment bank’s commodities research team noted.

It noted that the OPEC+ cut was already priced into current oil prices and forecast a pull-back in short-term Brent crude prices to $US35 a barrel while warning the global oil demand might return to pre-COVID-19 levels before the end of 2021.