Oil prices advanced by more than 2% on Tuesday on expectations that the June OPEC + talks would have a positive outcome for the market. The initial date for the meeting is June 9-10, but rumors emerged this week that it can be brought forward to this Thursday. Potential market surprise centers on the question whether existing cuts will be extended beyond the end of June.

Under current terms of the deal participants agreed to reduce output by 9.7 million bpd starting from May, which is about 10% of pre-crisis oil consumption level.

Since current output quotas expire at the end of June, producers can start to increase output in July with next production cut target at only 7.7 million bpd. This reduced cap should stay in place till the end of this year. If producers agree to extend current cuts (i.e. 9.7 million bpd) for a while longer, this will likely surprise market to the upside despite recent rally.

One of the signs of a positive outcome is the level of compliance with the cuts: Iraq and Nigeria reduced output by only 42% and 33% from the quota, while Saudi Arabia fulfilled the plan by 97.7%. The average level of compliance was 77%, as evidenced by the decrease in OPEC production in May by only 5.84 million bpd compared to April. Another sign is Asian manufacturing PMIs which showed that activity continued to deteriorate despite reopenings which is certainly a downside factor for oil consumption recovery.

The biggest obstacle to extension of cuts is the position of Russia. There are also voluntary production cuts from Saudi Arabia, the UAE and Kuwait by 1.18 million b/d, starting in June which ease pressure on the deal members to extend cuts. It is unlikely that the Russian will want to tolerate more than two additional months of deep cuts, i.e. extension to September can be partially priced in.

After a brief lull, long positions of speculators on Nymex grew by almost 19K contracts in the week ending May 26th:

Short positions of managed money also increased by about 4K after protracted slump. The net position amounted to 374,810 contracts, the maximum since September 2018:

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