After months of neglect by traders, oil became a hot commodity again this month when Brent shot more than $ 65 a barrel and WTI hit more than $ 60 for the first time in a year. The meeting cast a shadow on OPEC + ‘s intention to reduce production as much as it does now. Oil steadily recovered, even before the United States lost some 40 percent of its oil production due to the Arctic cold snap that swept the country. The Texas freezer certainly helped, but the effect is already diminishing as traders take profits: Brent had fallen below $ 63 at the time of writing and WTI had fallen below $ 60 a barrel. Still, significant upside potential remains that could increase internal tensions between OPEC + members.
To begin with, demand for oil in the US is recovering. The recovery, Bloomberg reports, began with the vaccination campaign that began in December, and refineries have since ramped up fuel production. The past few weeks have seen petrol supplies are increasing, but so is production.
While demand recovers from the world’s largest oil buyer, production is stalling. According to the EIA, US production will also remain below 12 million barrels per day next year. This imbalance will make the United States, EIA, a net exporter this year and next said in its latest Short-Term Energy Outlook. More importantly for OPEC +, this would drive up oil prices even further, tempting members who are barely compliant to even less compliant.
There is already disagreement within the extensive oil cartel. The last time OPEC + made a decision on production, it had to compromise to take into account the interests of those – such as Russia – pushing for a rollback of the biggest cuts in production. And now Saudi Arabia has said it would suspend its voluntary unilateral additional cuts of 1 million bpd and that Riyadh has continued in its all-necessary quest for higher prices.
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That is the clearest sign yet that OPEC’s de facto leader and largest producer is becoming more optimistic about prices. According to the Wall Street Journal report that the news broke, but the decision could still be reversed if the price situation changes. Ironically, the very news that Saudi Arabia will add another million barrels to global supply daily is likely to have a negative effect on prices once the Texas frozen frenzy fades.
But while Saudi Arabia remains ready to do whatever it takes, Russia views the oil market as already rebalanced. Deputy Prime Minister Alexander Novak said just as much last week as quoted by Russian media.
“We have seen low volatility in recent months. This means that the market is in balance and the prices we see today are in line with the market situation, ”Novak told TV channel Rossiya 1. Novak added that oil demand was 20-25 percent lower last spring. than the normal level at the moment. of the year, by the end of 2020, the decline had slowed to 8-9 percent. And Russia remains one of the barely compliant countries in the OPEC + agreement. Like Iraq, Russia is even producing above its quota.
Speaking of Iraq, the country reported an increase in oil exports during the first two weeks of February, despite efforts to further reduce crude oil production to offset last year’s overproduction. According to Bloomberg, Iraq could exceed its self-imposed limit of 3.6 million bpd and even its OPEC + limit of 3.85 million bpd throughout the month.
And then there is Iran, which already is stimulate production because it is exempt from OPEC + austerity and has big plans for its return to the international oil stage after US sanctions are lifted. This has yet to happen, after Washington banned the abolition of sanctions for Iran’s suspension of uranium enrichment activities.
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In what could be seen as a goodwill gesture, the US earlier this month said it had retracted a statement by the Trump administration that all UN sanctions against Iran had fallen back. The statement was void because it used provisions from the 2015 Iran nuclear deal that left the US before making the statement. At least Iran has reasons for optimism that it will soon be sanction-free and ready to pump more.
The disagreement between production-chopping hawks and production-growing pigeons within OPEC + will only intensify with the latest bullish news on oil. It has already prompted Saudi Arabia’s oil minister to warn of complacency.
“I must warn again about complacency,” said Prince Abdulaziz bin Salman earlier this week quoted by Bloomberg. “Uncertainty is very high and we have to be extremely careful. The scars from last year’s events should teach us caution. “
Indeed, the uncertainty remains high, and then there is the threat of US producers giving in to the temptation of WTI by over $ 60. For now, they are honestly resisting it, perhaps with the same warning Bin Salman spoke of this week. But at some point the temptation can become irresistible, and what is a nightmare scenario for OPEC can happen again: US manufacturers are increasing production thanks to OPEC + efforts to keep prices high enough to make it economic.
For now, there are no signs that OPEC + will deviate from its current policy of sticking to 7.2 million bpd in cuts until April. But again, as Saudi Arabia’s best oiler said, “Those who try to predict OPEC + ‘s next step, to those I say, are not trying to predict the unpredictable.”
By Irina Slav for Oilprice.com
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