After months of negligence on the part of traders, oil became one hot merchandise again this month, as Brent rose more than $ 65 a barrel and the WTI topped $ 60 for the first time in a year. The rally overshadowed OPEC + ‘s decision to continue reducing production as much as it does now. Oil had steadily recovered even before the United States lost 40% of its oil production due to the Arctic cold wave that swept across the country. The Texas freeze has certainly helped, but its effect is already waning as traders make a profit: Brent was down less than $ 63 at the time of writing and WTI had fallen below $ 60. the barrel. However, there is substantial upside potential that could increase internal tensions between OPEC + members.
On the one hand, US oil demand is recovering. The recovery, according to Bloomberg, began with the start of vaccination that began in December, and since then, refiners have been increasing fuel production. The last two weeks have done that seen gasoline stocks increase, but so does production.
As demand for the world’s largest oil consumer recovers, production is stagnating. According to the EIA, US production will remain below 12 million bpd next year as well. This imbalance will make the United States a net exporter this year and next, EIA dit in its latest short-term energy outlook. But more importantly for OPEC +, this would raise oil prices even further, tempting members who barely comply with regulations to comply even less.
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 — who insisted on a setback from deeper production cuts. . And now, Saudi Arabia has said it would suspend its additional unilateral voluntary cuts amounting to one million barrels per day and that Riyadh carried out in its pursuit of higher prices.
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This is the clearest sign that the de facto leader and largest producer of OPEC bills is becoming increasingly optimistic about prices. According to the Wall Street Journal report which gave the news, however, the decision can still be reversed if the price situation changes. Ironically, it is likely that the very news that Saudi Arabia will add a million barrels a day to world supply is likely to have a negative effect on prices once the Texas freeze frenzy occurs.
But while Saudi Arabia remains prepared to do whatever it takes, Russia sees the oil market already rebalanced. Deputy Prime Minister Alexander Novak dit both last week as quoted by the Russian media.
“We have seen low volatility in recent months. This means that the market is balanced and the prices we see today are in line with the market situation, “Novak told Rossiya 1 TV channel. Novak added that while last spring oil demand was 20- 25% below its normal level at this time of year, by the end of 2020, the decline had been reduced to 8-9 percent, and Russia remains one of the nations barely complying with the agreement In fact, like Iraq, Russia has been producing more than its share.
Speaking of Iraq, the country reported an increase in oil exports during the first two weeks of February despite its attempt to further reduce crude production to offset its overproduction last year. Throughout the month, according to Bloomberg, Iraq may exceed its self-imposed limit of 3.6 million bpd and even its OPEC + limit of 3.85 million bpd.
And then there’s Iran, which it already is empowering production, as it is exempt from OPEC + cuts and has big plans for its return to the international oil stage after US sanctions are lifted. That hasn’t happened yet, after Washington tied the elimination of sanctions on Iran’s suspension for uranium enrichment activities.
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In what could be seen as a gesture of goodwill, the US earlier this month dit had overturned the Trump administration’s statement that all UN sanctions against Iran had receded. The statement was void because it used the provisions of the 2015 nuclear deal with Iran that the United States had left before making the statement. In any case, Iran has reason for optimism that it will soon be free of sanctions and ready to bomb more.
The discord between cut production hawks and production growth pigeons 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. quoted of Bloomberg. “Uncertainty is very high and we must be extremely careful. The scars of last year’s events must teach us caution. “
In fact, uncertainty remains high, and then there’s the threat that U.S. producers are succumbing to the WTI temptation of more than $ 60. For now, they have resisted, quite rightly, showing perhaps the same caution that Salman spoke of this week. But at some point, the temptation can become irresistible and what for OPEC is a nightmare scenario can happen again: US producers increase production thanks to OPEC + efforts to keep prices high enough high so that it is economical.
At the moment, there is no indication that OPEC + will deviate from its current policy of maintaining the cuts until April with 7.2 million bpd. But again, as Saudi Arabia’s first oil company dit, “Those who try to predict the next OPEC + movement, those I say, do not try to predict the unpredictable.”
By Irina Slav for Oilprice.com
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