Saudi Arabia and Russia are once again heading into an OPEC+ meeting on opposite sides of a crucial debate about the oil market.<\/p>\n
Riyadh is publicly urging fellow members to be \u201cextremely cautious,\u201d despite prices rebounding to a one-year high. In private, the kingdom has signaled it would prefer that the group broadly holds output steady, delegates said. Moscow, on the other hand, is\u00a0indicating\u00a0that it still wants to proceed with a supply increase.<\/p>\n
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 in February and March, but some see signs that could change as the negotiations get underway.<\/p>\n
\u201cThe key question for me is how they return the Saudi barrels,\u201d said Bill Farren-Price, a director at research firm Enverus and veteran observer of the cartel. The kingdom could potentially use them as \u201cleverage for getting a deal,\u201d he said.<\/p>\n
Ten months after slashing crude production when Covid-19 crushed global demand, the Organization of Petroleum Exporting Countries and its allies are still withholding 7 million barrels a day from the market, about 7% of global supply.<\/p>\n
It\u2019s 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\u2019 battered revenues.<\/p>\n
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\u00a0freezing weather\u00a0in Texas caused a slump in U.S. output.<\/p>\n
When OPEC+ gathers on March 4, it will discuss whether to provide more crude to the market in April. There will be two crucial decisions.<\/p>\n
First, 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.<\/p>\n
Second, 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.<\/p>\n
The kingdom initially announced this reduction would be\u00a0reversed in April, but their latest thinking is fluid and the next move hasn\u2019t been finalized, delegates said. Offering to maintain some part of this voluntary cut in April could give Riyadh a useful bargaining chip if it\u2019s seeking to limit the group\u2019s overall output increase.<\/p>\n
\u201cSome easing in production restraint is likely at the March meeting,\u201d said Bob McNally, president of consultant Rapidan Energy Group and a former White House official. \u201cThe real bargaining has yet to start and no decision has been pre-baked.\u201d<\/p>\n
Having differed over the pace of supply increases at the last two ministerial meetings, public comments from Riyadh and Moscow indicate that another debate looms.<\/p>\n
Russian Deputy Prime Minister Alexander Novak said on Feb. 14 that \u201cthe\u00a0market is balanced.\u201d While he hasn\u2019t publicly expressed a policy preference for the March 4 discussions, Novak argued at the last two OPEC+ meetings for production increases.<\/p>\n
Novak\u2019s Saudi counterpart also appears to be sticking to a familiar position.<\/p>\n
Acknowledging his stance might be unpopular, Saudi Energy Minister Prince Abdulaziz bin Salman warned his fellow producers against complacency. The group must recall the \u201cscars\u201d of last year\u2019s crisis and be \u201cextremely cautious\u201d in its next move, he said.<\/p>\n
\u201cThe football match is still being played, and it\u2019s too early to declare any victory against the virus,\u201d the prince said. \u201cThe referee is yet to blow the final whistle.\u201d<\/p>\n
Both arguments have merit.<\/p>\n
This year\u2019s 20% rally in crude prices has been sharp enough for major consumers such as India to complain about the squeeze, and for Wall Street banks and\u00a0trading houses\u00a0to predict further gains.<\/p>\n
Global inventories are falling \u201cvery fast\u201d and are set to diminish sharply later this year, according to the\u00a0International Energy Agency. Demand for petroleum products that cater to societies\u00a0working and consuming\u00a0at home is booming.<\/p>\n
After freezing storms in Texas shuttered as much as 40% of U.S. crude production in the past week, the\u00a0clamor for barrels\u00a0from refiners in some regions has grown stronger. There\u2019s 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.<\/p>\n
But at the same time, inventories remain significantly above average levels and the IEA forecasts they could pile up again next quarter. The supply disruption from the U.S. freeze won\u2019t last long enough to cause a shortage, according to OPEC+ delegates, who asked not to be identified because the information isn\u2019t public.<\/p>\n
Even after the rally, prices are still below the levels most OPEC members need to cover government spending, giving Riyadh extra leverage.<\/p>\n
\u201cThe elephant in the room is Saudi Arabia\u2019s gift of 1 million barrels a day in extra cuts,\u201d said Bjornar Tonhuagen, an analyst at consultants Rystad Energy AS. \u201cIf the gift is snatched back, prices cannot do else but decline.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":"
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