• 4 minutes Europeans and Americans are beginning to see the results of depending on renewables.
  • 7 minutes Is China Rising or Falling? Has it Enraged the World and Lost its Way? How is their Economy Doing?
  • 13 minutes NordStream2
  • 3 days Monday 9/13 - "High Natural Gas Prices Today Will Send U.S. Production Soaring Next Year" by Irina Slav
  • 15 mins California to ban gasoline for lawn mowers, chain saws, leaf blowers, off road equipment, etc.
  • 4 hours "Here is The Hidden $150 Trillion Agenda Behind The "Crusade" Against Climate Change" - Zero Hedge re: Bank of America REPORT
  • 1 day "A Very Predictable Global Energy Crisis" by Irina Slav --- MUST READ
  • 1 day An Indian Opinion on What is Going on in China
  • 10 hours Nord Stream - US/German consultations
  • 2 days Can Technology Keep Coal Plants Alive and Well?
  • 3 days Two Good and Plausible Ideas about Saving Water and Redirecting it to Where it is Needed.
  • 3 days Succession Planning in Human Resources for Vaccinated Individuals in the Oil & Gas Industry
  • 4 days Perfect Energy Storm in Europe: turning our back on fossil fuels is easier said than done!
  • 1 day U.S. : Employers Can Buy Retirement Security for $2.64 an Hour
  • 2 days Storage of gas cylinders
Vanand Meliksetian

Vanand Meliksetian

Vanand Meliksetian has extended experience working in the energy sector. His involvement with the fossil fuel industry as well as renewables makes him an allrounder…

More Info

Premium Content

Has This Record-Breaking Oil Rally Gone Too Far?

The Covid-19 pandemic has ravaged energy markets and decimated demand. Of the three fossil fuels, coal, natural gas, and oil, demand for the latter was affected most due to its importance for the transportation sector. With grounded airplanes, reduced shipping, and parked cars across the world, the consumption of petroleum products decreased significantly in 2020. As demand recovers and oil prices rise at the beginning of this year, markets are increasingly concerned that the OPEC+ agreement that has provided moderate stability, could be about to fall apart.

Last year, two of the three largest oil producers in the world, OPEC's de-facto leader Saudi Arabia and Russia, agreed on production cuts to stabilize the market and to prop up prices. This led to a record 9.7 million barrels per day (mbpd) being taken off the market. Although it's a massive number under normal circumstances, the cuts were barely enough to stabilize prices.

During the last OPEC+ gathering, negotiations were particularly difficult due to the diverging views of Russia and Saudi Arabia. For Riyadh, Moscow’s continued participation is crucial. Despite the challenges, the involved parties agreed to extend the production cuts. Russian producers were allowed to increase production in February and March by 65,000 bpd, while the Saudis voluntarily decreased production by one million bpd.

The parties are scheduled to meet again on March 4 to discuss production levels for April. The unprecedented price rally of the oil markets will undoubtedly create tension between the negotiators. According to Eugene Lindell from Vienna-based JBC Energy, “I do think that this meeting is going to be more difficult for Riyadh to argue for restraint, even though from a balanced perspective they [OPEC+] should restrain. So, make no mistake about that, the demand has not come back. The price is in a way artificially high. It’s gotten ahead of itself. It’s pricing more on future expectations than on current fundamentals.”

Related Video: To Pump Or Not To Pump: Big Oil Diverges On Production Strategy

The different views of Moscow and Riyadh are primarily caused by the countries’ diverging production and fiscal break-even prices. Both states enjoy low production costs. Saudi Aramco produces cheap oil due to do geological characteristics and the size of its reserves. Russian producers, however, command low operating costs and face progressive taxes. Also, Russia's floating exchange rate cushions the adverse effects of dollar-based commodity trades.

The situation changes when the importance of oil revenues for the national budget is taken into account. Riyadh's expected fiscal break-even price is around $66. This means that the Saudi’s have been using funds from their sovereign wealth fund most of last year to keep the country running. Russia, on the other hand, has a fiscal break-even price of $30-$40 which is considerably lower.

According to Ronald Smith, a Moscow-based analyst at BCS GM, “as long as oil is $45/bl or below, it is pretty easy to get everyone in OPEC+ on the same page and cut production. And when it is $65-$70/bn, everyone agrees it is time to put oil back on the market. But between $50/bl and $60/bl, that is where the interests diverge.”

Prices currently are hovering around the $60/bl. Saudi Arabia's predicament is made even worse with President Biden's presumed intention to engage with Iran on its nuclear program. This means that in 2021 Iranian oil could return to the market. Also, Venezuela could see a rebound in production. To make matters worse, Rystad Energy estimates that if WTI remains in the $50-$55/bl range, U.S. companies could add 300,000 bpd in 2021.

Then there is a number of  ‘usual suspects’ within OPEC that are known for non-compliance with production quotas such as Iraq and Nigeria. These two countries will likely advocate for increased production in March. However, as was said before, the unusual price rally seems to be based on future demand as a large part of the global air fleet is grounded and many countries face corona restrictions. Therefore, it is a matter of time until markets will realize that the oil price rally is unsustainable in the short-term.

By Vanand Meliksetian for Oilprice.com

More Top Reads From Oilprice.com:

Download The Free Oilprice App Today

Back to homepage

Leave a comment

Leave a comment

EXXON Mobil -0.35
Open57.81 Trading Vol.6.96M Previous Vol.241.7B
BUY 57.15
Sell 57.00
Oilprice - The No. 1 Source for Oil & Energy News