Brent crude prices dropped on Thursday morning, reversing the gains recorded yesterday, on reports that supply will rise if major crude oil producers fail to reach an agreement on crude oil output cuts that have helped in stabilizing crude oil prices since the start of COVID-19.

Brent crude lost 1.14 %, to trade at $39.38 a barrel at 3:40 am Nigerian time, failing to stay over the $40 resistance price level.

OPEC members such as Nigeria and Iraq have shown weak compliance in meeting their crude oil production reduction targets set last month.

“Overall, the market is moving in the right direction with the gradual easing of the lockdown. But we still need to be cautious. There is always a risk of another wave of the coronavirus,” the first OPEC source said.

“The other thing is how quickly demand patterns will recover. Inventories are still above average levels and that needs to be tackled.”

(READ MORE: OPEC+ to discuss extension of output cut as Chinese demands boost Nigerian oil)

OPEC+ had initially agreed to reduce crude oil production by a record 9.7 million barrels per day, or about 10% of global production of crude oil, for the month of May and June in order to minimize the damage caused by COVID-19 pandemic in weakening global demand for crude oil.

Meanwhile, OPEC+ private sources reportedly told Reuters that Saudi Arabia and Russia have agreed on a precursory deal to extend oil production cuts by one month while putting pressure on countries with poor compliance such as Nigeria and Iraq to deepen their oil production cuts.

What you should know about OPEC+: OPEC + came into light in late 2016 as a means for major oil-exporting countries to exercise their control over crude oil prices. Essentially, OPEC+ is an amalgamation of OPEC (Algeria, Angola, Congo, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, United Arab Emirates, Venezuela) and high oil-exporting non-OPEC countries like Mexico, Oman, South Sudan, Kazakhstan, and Russia.

Rather than reducing crude oil production cuts in July, OPEC+ was deliberating on keeping those cuts beyond June. 

“Saudi Arabia and Russia are aligned on the extension for one month,” one OPEC source said.

“Any agreement on extending the cuts is conditional on countries who have not fully complied in May deepening their cuts in upcoming months to offset their overproduction,” the private source told Reuters.

“I don’t think there will be a meeting on Thursday. There are still many challenges,” another OPEC source added.

Saudi Arabia and Russia, the leading producers in the OPEC+ alliance, have reached a preliminary agreement to extend the current level of output cut of 9.7 million barrels per day by an additional month.

The agreement was reached on the condition that member countries, led by Iraq and Nigeria, who failed to comply with the agreed output cut for May, must ensure over-compliance going forward in order to make up for the non-compliance of their allocated quotas.

The alliance, which helped to revive global oil markets, was earlier troubled by disagreement among members after the likes of Nigeria broke their promises. The Russians and Saudis have, therefore, warned that they will start phasing out supply cuts if the likes of Iraq, Nigeria, and even Kazakhstan do not shape up and conform to the earlier agreement.

The two leading oil producers in the cartel are not just demanding that these non-compliant member countries implement the output cuts already promised, but also want deeper output cuts in the coming months to make up for their earlier failings.

(READ MORE: Global oil market to re-balance in 2 months’ time)

According to the initial agreement reached in April, OPEC+ was to cut 9.7 million barrels per day in combined production for May and June and then ease these to 7.7 million barrels per day until the end of the year. From January 2021, the production cuts would be further eased to 5.8 million barrels per day, to remain in effect until the end of April 2022.

Meanwhile, despite the non-compliance by some OPEC member countries in May, the market expected that the OPEC+ coalition would be motivated enough to extend the current output cut of 9.7 million barrels per day through July/August.

It had been speculated that the OPEC+ cartel could hold its June meeting earlier than initially planned. However, the meeting is being held up by the fact that Saudi Arabia and Russia will be requiring assurances from non-compliant members that they will over-comply going forward, as a form of compensation. These members are Iraq and Nigeria from OPEC and Kazakhstan from non-OPEC.

As part of signs that the global oil market is moving closer to rebalancing, Nigerian Bonny light price against earlier predictions, surged closer to $40, as it closed at $37.57 per barrel mark, up by 5.57% on Wednesday.

This is coming against the backdrop of a decline in crude oil inventory by 483,000 barrels for the week ending May 29, as estimated by the American Petroleum Institute (API) on Tuesday, and signs that OPEC+ producers are close to agreeing on a short extension of their historic deal to cut output.

According to data from oilprice, the Brent crude was sold for $39.79 per barrel. The American WTI dropped to $36.79 per barrel.

Meanwhile, Russia and some other OPEC+ member countries are pushing for an extension by a month or 2 of the current output cut of 9.7 million barrels per day beyond June. This is within the 1-3 months’ extension that Saudi Arabia is pushing for.

(READ MORE:Crude oil prices rally as investors remain optimistic about oil production cut)

Either way, the market likes the idea of more cuts, with the understanding that going through with the earlier agreed output cut after June, will not be enough to draw down the global oil glut that is negatively affecting prices and building up inventories.

Analysts had predicted an inventory build of over 3 million barrels, and last week, the API had predicted a crude oil inventory of 9.731 million barrels. Meanwhile, the Energy Information Administration (EIA) estimated that the inventory was going to be up by 7.9 million barrels by last week.