Trouble is piling up for risk assets. Sentiment was knocked yesterday by a trifecta of simmering geopolitical tensions, the raging COVID pandemic and disappointing US jobs data. Tensions between the US and China have risen of late after the latter was ordered to close its consulate in Houston. This set the stage for a tit-for-tat retaliatory response and Beijing was only too happy to oblige. Overnight, it announced the closure of the US consulate in Chengdu.

All the while, the US continued to make headlines for all the wrong reasons. COVID cases topped 4 million as deaths rose by more than 1,000 for the third straight day. The surging number of coronavirus infections has forced several states to roll back reopen plans, which in turn has derailed the US labour market recovery. Weekly jobless claims rose last week to 1.4 million, up from 1.3 million in the previous seven days and more importantly the first increase since March. More of the same is expected in the coming weeks given that the pandemic is yet to be brought under control. In short, the alarm bells are ringing for the US economy.

Against this chilling backdrop, leading US equity gauges suffered their biggest one-day fall in almost four weeks. The S&P 500 fell 1.2% while the tech-focused Nasdaq Composite shed 2.3%. Oil also lost its lustre as demand-side jitters returned to the fore of concerns. Not even an ailing dollar could spare bulls’ blushes. Brent lost 98 cts/bbl to settle at $43.31/bbl while WTI finished 83 cts lower at $41.07/bbl. Both crude benchmarks are roughly back where they were before this week’s upside breakout. Looking ahead, the oil market will likely settle back into a wait-and-see mode amid the increasingly uncertain environment.

The Terrible Threes 

Iraq, Nigeria and Angola. These three OPEC members have stained overall impressive adherence to OPEC+ cuts. The underperforming trio dragged its feet in trimming production as the new OPEC supply cut pact took effect in May. Now, though, they are finally starting to toe the line. All three substantially cut production in June, though they still pumped over their quotas. Nevertheless, in a bid to appease the OPEC leadership, they agreed to compensate for overproducing by making extra cuts in 3Q20. Initial signs suggest this may turn out to be wishful thinking.

Iraq, the least compliant member of the coalition, cut production by a significant 449,000 bpd to in June to a five-year low of 3.71 mbpd. Yet this eagerness for production restraint seems to be missing somewhat this month. Just this week, Iraq restarted the 75,000 Gharraf oil field following a four-month shutdown. All the while, early tanker-tracking data for July indicates Iraq’s crude oil exports are on the rise. Shipments from its southern ports averaged 2.7 mbpd in the first 20 days of July, according to Refintiv. This is unchanged from June. However, exports from northern Iraq have so far averaged at least 450,000 bpd, up from 370,000 bpd in June. Assuming exports in July hold steady, Iraq’s compliance to cuts will fall to 65% from 88% in June, according to Reuters calculations. All in all, it appears that OPEC’s second-biggest producer is still struggling to honour its pledge.

Nigeria, meanwhile, moved closer in June to full compliance with its OPEC+ target with output falling 88,000 bpd to 1.5 mbpd. While this was still 90,000 bpd above its quota, the Federal Government said the OPEC member will comply fully with its target by mid-July. Indeed, there is evidence to suggest that Nigeria is further limiting supply. Tanker-tracking data shows a considerable decline in exports in early July. Moreover, a preliminary loading schedule shows exports of Nigeria’s four main crude oil grades set to fall again in August, albeit only slightly. That said, one potential fly in the ointment is the fact that production at Nigeria’s 225,000 bpd Bonga oil field is ramping up following the completion of repairs.

Staying on the continent, fellow WAF producer Angola came within sight of full compliance in June after cutting output by 51,000 bpd to 1.22 mbpd. Nevertheless, despite promising further improvements in conformity, Angola appears to be digging in its heels again. Falling oil prices and the coronavirus pandemic have hit Angola’s economy harder than most. The country is on track for its fifth annual decline in GDP. Hefty debt repayment deadlines mean that it is reluctant to forego much-needed oil revenues. Accordingly, loadings to its principal buyer China have remained strong. What is more, it has vowed to continue delivering full contractual volumes. Needless to say, this is not conducive for a pullback in production.

As much as this OPEC-triumvirate has recently endeavoured to fulfil their obligations under the OPEC+ deal, it should be taken with a big pinch of salt. Nothing is certain in the oil market, especially in today’s health and economic crisis. That said, there is a very real risk that Iraq, Nigeria and Angola will continue to fall short of their targets. In any case, compliance to OPEC-led cuts will be in sharp focus over the coming months. And the failure by the Terrible Threes to further improve compliance with OPEC-led cuts will give plenty of scope for other producers within the OPEC+ alliance to start slipping.