OPEC+ Output Cut Extension Boosts Optimism And Drives Prices Higher

Brent closed on Friday near $42/b on reports that the OPEC+ group has agreed to a one-month extension of the 9.7mb/d production cuts that were initially meant to apply only for May and June. 
 
Pressure from Russia and Saudi Arabia has led Iraq to agree not only to comply rapidly with targeted production cuts but to compensate for under-compliance last month. This is hugely positive for sentiment as the presumption is this clampdown will accelerate the rebalancing of supply and demand. 
 
The recognition that the deep cuts need to continue for a month or perhaps longer shows that despite the recent surge in oil prices, the large producers remain worried about the fragile state of the oil markets.
 
Oil prices have been steadily rising from improvements in real-time mobility data and better macro data, including Friday's US employment report. But with OPEC presenting a unified front and dogged determination to bring order to the oil market by introducing unprecedented penalties for under compliance, the oil rally should extend this week even although the production cut extension is likely priced in after Friday's ramp in oil markets.
 
Pressuring lower compliance participants is unambiguously positive for oil markets. With more loosening of global lockdown restrictions in the coming weeks, particularly in large US states, this should lead to increased driving activity and support for oil prices. 
 
There is much more significance to the conclusion of the OPEC meeting than initially conjectured, which in most circles was a rubber-stamping of the one-month extensions. OPEC's Saturday proceedings may be the harbinger of continued dogged compliance for the future of the May 2020-April 2022 supply agreement
 
Earlier in the week, oil traders were attaching relatively little importance in whether the May/Jun cuts would be extended for a third month into July. The bigger question has been around Russian compliance and its inclination to continue with the supply discipline and the prospects of shale producer ramping up in concert with higher prices. 
 
On the latter point, there is plenty of evidence shut-in US production is returning. But the hope is that while US producers will seek to maximize returns from existing wells as oil prices move higher, they will exercise a greater level of capital discipline when it comes to plans for new drilling. 
 
On the rhetoric side, Russia has been rather non-confrontational throughout the process, which is always a good sign for markets. 
 
With both Russia and Saudi Arabia presenting a unified front, the markets should relish that both are keen to demonstrate continued commitment to rebalancing the market and supporting oil prices going forward.