The oil-exporting countries find themselves in a fix on account of the levels of output with deep divisions emerging about the issue. OPEC+ has already broken the grip of Saudi-led cartel and Russia has emerged as the new and ardent arbiter of oil affairs. Obviously Russia views this matter in different light and almost in complete contrast to the position taken by Saudi Arabia. This diversion of view has been made evident by the fact that Saudi Arabia and Russia are once again heading into an OPEC+ meeting on opposite sides of a crucial debate about the oil market.
Riyadh is publicly urging fellow members to be extremely cautious despite prices rebounding to a one-year high. In private, the kingdom has signaled it would prefer that the group broadly holds output steady and keeps it in tight control. Moscow, on the other hand, is indicating that it still wants to proceed with a supply increase as it suits its geostrategic ambitions. The positions mirror those taken at recent meetings, but this time the Saudis have a new bargaining chip — 1 million barrels a day of voluntary cuts. The kingdom pledged to make these extra curbs only for February and March but some see signs that could change as the negotiations get underway.
Ten months after slashing crude production when COVID-19 crushed global demand, the Organisation of Petroleum Exporting Countries and its allies are still withholding 7 million barrels a day from the market, about 7% of global supply. It has been a sacrifice, with members such as Iraq and Nigeria struggling economically as exports dropped but it has yielded results, reviving prices to above $65 a barrel in London and shoring up producers’ battered revenues. By most estimates, the cuts have meant oil demand exceeded production this year by a wide margin. The supply gap grew even wider last week as freezing weather America caused a slump in US output.
In its forthcoming meeting on 4 March 2021 OPEC+ will discuss whether to provide more crude to the market in April. There will be two crucial decisions and the first would be that the group as a whole must choose whether to restore as much as 500,000 barrels a day, the next step in a gradual revival of production that was agreed on in December, but paused at the January meeting. Secondly, Saudi Arabia must determine the fate of the extra 1 million barrels a day of extra voluntary cuts it is making this month and next to help clear surplus inventories even more quickly.
Saudi Arabia initially announced this reduction would be reversed in April but their latest thinking is fluid and the next move has not been finalised. Offering to maintain some part of this voluntary cut in April could give Riyadh a useful bargaining chip if it is seeking to limit the group’s overall output increase. Some easing in production restraint is likely at the March meeting but the real bargaining has yet to start and no decision has been on the anvil as yet.
There has been a looming debate in which differences have arisen over the pace of supply increases at the last two ministerial meetings as public comments from Riyadh and Moscow indicate that another debate looms. Russian stance is that the market is balanced while it has not publicly expressed a policy preference for increase though the Russians argued at the last two OPEC+ meetings for production increases. Both the Saudis and Saudis appear to be sticking to a familiar position. Saudis have been consistently warning their fellow producers against complacency and it advises the group to keep in view the scars of last year’s crisis and be extremely cautious in its next move.
Most analysts point out that both arguments have merit as this year’s 20% rally in crude prices has been sharp enough for major consumers to complain about the squeeze and for Wall Street banks and trading houses to predict further gains. Global inventories are falling very fast and are set to diminish sharply later this year. Demand for petroleum products that cater to societies working and consuming at home is booming. After freezing storms in Texas shuttered as much as 40% of US crude production in the past week, the clamour for barrels from refiners in some regions has grown stronger.
There is also the risk for OPEC+ that, once the weather-related disruption in the shale heartlands abates, high prices would provoke a new flood of supply but at the same time, inventories remain significantly above average levels and the forecasts are that they could pile up again next quarter. It is however acknowledged that the supply disruption from the US freeze would not last long enough to cause a shortage.
It must also be kept in view that even after the rally, prices are still below the levels most OPEC members need to cover government spending, giving Riyadh extra leverage. It is also pointed out that the main disconcerting fact is the Saudi Arabia’s gift of 1 million barrels a day in extra cuts and it is becoming clear that if the gift is snatched back, prices cannot do else but decline. TW