There’s a quip I heard recently where someone asked “why did 2020 feel like a losing year, and the answer was because 20-twenty-won (2021). It appears 2021 looks like a winning year for OPEC and her allies as prices have rallied to the highs last seen since February 2020.
This comes as Saudi Arabia shocked the oil markets a week ago by cutting their output significantly amid concerns that new coronavirus lockdowns will hit demand. This generous offer pushed Oil prices nearly five percent.
The news Saudi Arabia would make voluntary oil output cuts of one million barrels per day (bpd) in February and March was a big brother move by Saudi Arabia as most producers were disgruntled with reducing output amidst their respective economies. In a form of encouragement to other members, these cuts would encourage most producers from the group consisting of the Organization of the Petroleum Exporting Countries and allies to help stabilize the markets. Bjornar Tonhaugen, Rystad Energy’s head of oil markets described the move as “the cherry on the cake and the happy hour for the oil markets.”
But what makes the move very surprising was the deadlock that followed OPEC+ talks before Saudi acted. Russia and Kazakhstan, the + IN OPEC+ will be given the license to produce more oil over the coming months under the new deal. Albeit, the confusion in OPEC policies. On what premise are Russia and Kazakhstan given these special quotas? This is probably Saudi Arabia trying to avoid any rift like what we experienced in 2020.
The Saudi Minister said “We did not ask any country to come forward and do any cuts, we do this to support our economy and the economies of our fellow producers”
“It is indeed quite shocking that Riyadh is proposing to cut its output, as it could effectively mean that it is willing to forego market share,” said Bjornar Tonhaugen, Head of oil market research at Rystad Energy. The big brother role Saudi plays shows why Saudi Arabia is more than making up for Russia and Kazakhstan as they both increase output.
OPEC initially failed to agree on production levels for February during a meeting early this year. But new variants of the coronavirus look to be more transmissible and have been detected in many of the world’s biggest economies, raising fears that governments have to act faster. 2.2 million people have died from the coronavirus and over 100 million people have been affected. Given the concerns with the vaccine effectiveness, distribution, right to dosage, fear about the vaccines, and accessibility especially in Europe, the pandemic may stay much longer.
From the last meeting, most countries in the OPEC+ group supported rolling over production levels from January, but rebel Russia favored another increase of 500,000 barrels per day, according to reports from an OPEC source to CNN Business.
Now let’s analyze both parties. Here we have the Saudi Minister, Prince Abdul Aziz urged who was, telling delegates that the “level of uncertainty in the world remains high,” and that a new wave of restrictions on activity could harm demand for transportation fuels.
“I urge you today not to take for granted the progress we have made as a group over the past year,” the prince said in his opening remarks. “Do not put at risk all that we have achieved for the sake of an instant, but illusory, benefit.”
On the other side of the divide, we have the Russian Deputy Prime Minister Alexander Novak who was pushing for an increase of 500,000 barrels per day in February, according to comments reported by Reuters.
Clearly, the OPEC+ group still has divides amongst them. Although all parties come to a consensus at the end, it still shows there are cracks. The last time the group splintered, back in March, a brief but intense battle for market share ensued between Saudi Arabia and Russia that sent oil prices crashing.
Now, increasing production in the face of weak demand could cause prices to drop. But some of the group’s producers are worried about giving up market share to rivals including US shale producers.
What then is OPEC’s strategy for dominating market share?
The dilemma persists because of two things. Does OPEC over flood the market and crash prices which ultimately ruins the profitability of shale producers? The disadvantage of that is countries that have revenue solely dependent on oil will suffer immensely. Will it be for the greater good? It just might be futile as shale producers can find CAPEX (capital expenditure) to run their companies. In the next few years, let’s see what happens with OPEC and how everything would play out.