After months of neglect from traders, oil became a hot commodity again this month as Brent surged over $65 a barrel and WTI topped $60 for the first time in a year. The rally cast a shadow over OPEC+’s resolve to keep cutting as much production as they are cutting now. Oil had been recovering steadily even before the United States lost some 40 percent of its oil production because of the Arctic cold wave that swept across the country. The Texas deep freeze certainly helped it, but its effect is already dwindling as traders take profits: Brent was down to less than $63 at the time of writing, and WTI had slipped below $60 a barrel. Yet a substantial upside potential remains that could increase internal tensions between OPEC+ members.
For one thing, U.S. demand for oil is recovering. The recovery, Bloomberg reports, started with the vaccination drive that began in December, and since then, refiners have been ramping up fuel production. The last couple of weeks have seen gasoline stocks rise but so has production.
While demand in the world’s top consumer of oil recovers, production is stalling. According to the EIA, U.S. output will remain below 12 million bpd next year as well. This imbalance will turn the United States into a net exporter this year and next, EIA said in its latest Short-Term Energy Outlook. But more importantly for OPEC+, this would push oil prices higher still, tempting barely compliant members to become even less compliant.
There is already discord within the extended oil cartel. The last time OPEC+ made a decision on production, it had to make a compromise decision to take into account the interests of those—like Russia—that insisted on some rollback of the deepest production cuts. And now, Saudi Arabia has said it would suspend its voluntary unilateral additional cuts that amounted to 1 million bpd and that Riyadh effected in its whatever-it-takes quest for higher prices.
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That’s the clearest signal yet that OPEC’s de facto leader and biggest producer is becoming more optimistic about prices. Per the Wall Street Journal report that broke the news, however, the decision may yet be reversed if the price situation changes. Ironically, the very news that Saudi Arabia will add another million barrels daily to global supply is likely to have a negative effect on prices once the Texas deep freeze frenzy fizzles out.
But while Saudi Arabia continues to be ready to do whatever it takes, Russia sees the oil market as already rebalanced. Deputy Prime Minister Alexander Novak said as much last week as quoted by Russian media.
“We’ve seen low volatility in the past few months. This means the market is balanced and the prices we are seeing today are in line with the market situation,” Novak told TV channel Rossiya 1. Novak added that while last spring oil demand was 20-25 percent lower than its normal level at this time of year, by the end of 2020, the decline had shrunk to 8-9 percent. And Russia remains one of the barely compliant nations in the OPEC+ agreement. In fact, like Iraq, Russia has been producing over its quota.
Speaking of Iraq, the country reported an increase in oil exports for the first two weeks of February despite its attempt to reduce production of crude oil further to compensate for its overproduction last year. For the full month, according to Bloomberg, Iraq may exceed its self-imposed cap of 3.6 million bpd and even its OPEC+ cap of 3.85 million bpd.
And then there is Iran, which is already boosting production as it is exempt from the OPEC+ cuts and has big plans for its return on the international oil stage after U.S. sanctions are lifted. This has yet to happen, after Washington tied the removal of sanctions on Iran’s suspension of uranium enrichment activities.
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In what could be seen as a gesture of goodwill, the U.S. earlier this month said it had rescinded a declaration by the Trump administration that all UN sanctions against Iran had snapped back. The declaration was void because it used provisions from the 2015 nuclear deal with Iran that the U.S. had left before making the declaration. In any case, Iran has reasons for optimism that it will be sanction-free soon and ready to pump more.
The discord between production cut hawks and production growth doves within OPEC+ will only deepen with the latest bullish news on oil. It already led Saudi Arabia’s oil minister to warn against complacency.
“I must warn once again against complacency,” Prince Abdulaziz bin Salman said earlier this week as quoted by Bloomberg. “The uncertainty is very high and we have to be extremely cautious. The scars from the events last year should teach us caution.”
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Uncertainty indeed remains high, and then there is the threat of U.S. producers giving in to the temptation of WTI at over $60. For now, they have been resisting it, in all fairness, perhaps displaying the same caution bin Salman talked about this week. But at some point, the temptation may become irresistible, and what for OPEC is a nightmare scenario may happen again: U.S. producers ramping up output thanks to OPEC+ efforts to keep prices high enough to make it economical.
For now, there is no sign that OPEC+ will depart from its current policy of sticking with 7.2 million bpd in cuts until April. But, again, as Saudi Arabia’s top oilman said, “Those who are trying to predict the next move of OPEC+, to those I say, don’t try to predict the unpredictable.”
By Irina Slav for Oilprice.com
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With rising crude oil prices, OPEC+ will have to adapt its cuts to the needs of the market to ensure that a demand-supply balance exists in the market.
Still, the oil strategies of the leaders of OPEC+, namely Russia and Saudi Arabia will diverge with rising oil prices because Russia’s economy can easily live with an oil price of $40 a barrel or less whilst Saudi Arabia and the overwhelming majority of OPEC members need an oil price higher than $80 to balance their budgets. And whilst Russia believes that an oil price ranging from $60-$65 can delay a comeback of US shale oil production, Saudi’s and other OPEC members’ motivation is to get prices as close as possible to $80 or even higher.
However, the bottom line is that Russia and Saudi Arabia will continue to cooperate even with rising oil prices because such cooperation has entrenched OPEC+’s position as the pillar of the global oil market and provided both of them with huge unrivalled influence over the global oil market and prices.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London