OPEC Agree Nine-Month Extension, but Recovery Must Be Demand-Led

Oil prices sold off by ~4% following the OPEC meeting (1 st July) , despite the group agreeing to extend cuts to the end of 1Q20. Although on the surface the supply reduction is impressive, the group is reliant on outages to withhold oil from the market as Saudi Arabia’s aggressive cut is largely offset by Iraqi non-compliance. The group’s new inventory target (using 2010-14 instead of 2014-18 as a reference) is unrealistic and reckless, in our view. By our count, this would require a deeper cut of an additional 0.89mn b/d in 2H19 to achieve and would bring inventories expressed as days of forward cover to a decade low. OPEC’s “forever cut” is ultimately a bearish signal with the market eventually needing to be led higher by consumption growth. Supply outages will not make higher prices stick given prevailing recessionary concerns. Despite the muted response to OPEC’s agreement, w e hold our view that 2H19 will be constructive for prices as refinery runs increase significantly on a seasonal and one-off (IMO clean product demand-related) basis , and expect Brent to average $70/bbl and WTI $62/bbl in the second half of the year.