By Grant Smith, Salma El Wardany and Javier Blas On 21/02/2021
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LONDON (Bloomberg) – Saudi Arabia and Russia are facing another OPEC + meeting on either side of a pivotal debate on the oil market.
Riyadh publicly calls on his fellow members to be “extremely careful” despite rising prices to their highest point in a year. Privately, the kingdom has indicated that it prefers the group to keep output broadly stable, the delegates said. Moscow, on the other hand, indicates that it still wants to continue increasing the supply.
The views are consistent with those of recent rallies, but this time the Saudis have a new bargaining chip: 1 million barrels per day with voluntary cuts. The kingdom promised not to make these additional curbs until February and March, but some are seeing signs that may change as negotiations get underway.
“The most important question for me is how they bring the Saudi barrels back,” said Bill Farren-Price, director at Enverus research firm and veteran observer of the cartel. The kingdom could potentially use them as “leverage to make a deal,” he said.
Bargaining chip
Ten months after cutting back crude oil production when Covid-19 crushed global demand, the Organization of Petroleum Exporting Nations and its allies are still holding 7 million barrels a day off the market, about 7% of global supply.
It has been a sacrifice, with members like Iraq and Nigeria struggling economically as exports fell. But it has paid off, pushing prices in London above $ 65 a barrel and supporting producers’ battered revenues.
By most estimates, the austerity measures resulted in oil demand being far exceeded this year. Supply shortages widened last week as freezing weather in Texas caused a slump in US manufacturing.
When OPEC + meets on March 4, it will discuss whether more crude oil will hit the market in April. Two crucial decisions will be made.
First, the group as a whole must choose whether to restore as much as 500,000 barrels per day, the next step in a gradual revival of production agreed in December but interrupted at the January meeting.
Second, Saudi Arabia must determine the fate of the additional 1 million barrels per day in additional voluntary cuts it is making this month and then to clear up excess supplies even faster.
The kingdom initially announced that this cut would be reversed in April, but their latest ideas are flowing and the next step has not yet been completed, delegates said. Offering to maintain some of this voluntary cut in April could give Riyadh a useful bargaining chip if it is to curb the group’s overall output growth.
“Some loosening of production constraints is likely at the March meeting,” said Bob McNally, president of consultant Rapidan Energy Group and a former White House official. “The real negotiations have yet to begin and no decision has yet been made.”
Threatening debate
As there was a difference in the pace of supply at the last two ministerial meetings, public comments from Riyadh and Moscow indicate that there is still a debate lurking.
Russian Deputy Prime Minister Alexander Novak said on February 14 that “the market is in equilibrium”. Although he has not publicly expressed a policy preference for the March 4 discussions, Novak has argued for increases in production at the last two OPEC + meetings.
Novak’s Saudi counterpart also appears to be holding on to a well-known position.
Saudi Energy Minister Prince Abdulaziz bin Salman may not have recognized his position and warned his fellow producers against complacency. The group should remember the “scars” of last year’s crisis and be “extremely cautious” on the next step, he said.
“The football game is still being played and it is too early to declare a victory against the virus,” said the prince. “The referee has yet to blow the final whistle.”
Saudi Gift
Both arguments are valuable.
The 20% rise in crude oil prices this year was sharp enough for big consumers like India to complain about the tightness, and for Wall Street banks and trading houses to forecast further gains.
Global inventories are declining “very rapidly” and will decline significantly later this year, the International Energy Agency said. The demand for petroleum products for societies that work and consume at home is booming.
After frigid storms in Texas cut as much as 40% of US crude oil production last week, calls for barrels from refineries have grown stronger in some regions. There is also the risk to OPEC + that once the weather-related disruption in the shale core countries subsides, high prices would trigger a new flow of supply.
But at the same time, stocks remain significantly above average and IEA forecasts predict they could pile up again next quarter. The supply disruption from the US freeze won’t last long enough to cause a shortage, according to OPEC + representatives, who asked not to be identified because the information is not public.
Even after the rally, prices are still below the level most OPEC members need to cover government spending, giving Riyadh extra power.
“The elephant in the room is a gift from Saudi Arabia of 1 million barrels per day in extra cuts,” said Bjornar Tonhuagen, an analyst at Rystad Energy AS. “If the gift is taken back, the prices can’t help but fall.”