Oil market rebalancing as OPEC cuts take effect

By Helima Croft
Published May 19, 2020 | 9 min watch

Despite oil’s rally, I would continue to assert caution. Concerns about a second COVID-19 wave remain, and the recovery will likely be a long and difficult one over the coming quarters. Some producers are better equipped to deal with the low oil price environment.

Required Conflicts Disclosures


Geopolitics: Remaining Watchful

In the current low-price environment, we only expect a small sub-set of producers, principally the small GCC states, to be able to endure an additional six months of $30+/bbl prices and emerge relatively unscathed. Out of them the UAE. With about $1.1tn in sovereign wealth fund holdings and non-oil revenue accounting for around 60% of total government revenue, the Emirates are probably best placed to weather such a scenario.

I have recently spoken via video link to the UAE Minister of State and ADNOC CEO, H.E. DR. Sultan Al Jaber, who shared his thoughts on the global economic outlook. He expects the recovery will be more ‘U’ than ‘V’-shaped but sees good signs for the oil market. “The market has tightened in recent weeks, and the OPEC++ agreement, voluntary cuts outside of OPEC, and the production shutdowns are working together to start to rebalance the market” he stressed. “This will take time,” he added.

Watch the interview between Helima Croft and H.E. Dr. Sultan Al Jaber, UAE Minister of State and ADNOC CEO


A Shot of Adrenaline

Saudi Arabia again finds itself sitting squarely in the middle of the spectrum. The central banker of oil and the leader of OPEC, is drawing down reserves at a rapid rate, tapping international debt markets, and implementing painful budget cuts in order to ride out of the storm. On May 11, the country announced a series of historic energy and fiscal measures, including a 1 mb/d production cut, which shows just how challenging the economic outlook is for the Kingdom amid the unprecedented collapse in oil prices.


Concerns about the Poorest Producers

Some producers will face a bleak economic outlook even if in case of a small recovery. Iraq, in particular, is the one we should be worried about. It does not have the cash required to pay salaries and perform essential services. Its security environment remains fragile and the political vacuum in Baghdad remains a key concern. Any oil recovery is conditional to an easing of the COVID-19 global health crisis and the outlook for oil producers is very much dependent on the virus’s trajectory. A vaccine breakthrough could significantly improve the outlook for oil and the small producers. A second COVID-19 wave, on the other hand, would be a blow to even the most financially sound sovereign producers.

For a deeper dive into the oil market, read the full research report authored by Helima Croft. For more information, please contact your RBC sales representative.

Helima Croft

Helima Croft
Global Head, Commodity Strategy

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