Oil Prices: The Situation Prior to the OPEC Meeting

Oil prices are expected to move significantly in the coming days due to the OPEC+ meeting scheduled for Thursday, March 4. Member countries will discuss whether to supply more crude oil to the market.

Currently, there are differences within the organization as to the strategy to be adopted to supply oil. Russia would indeed be more inclined to supply the market than Saudi Arabia.

Should production be increased or maintained? A look at the different positions taken.

Oil prices rebound on pandemic

2020: OPEC cuts supply to maintain price

The price of oil has suffered, like all sectors of the economy, from the global coronavirus pandemic. The latter has indeed crushed global demand, and forced OPEC+ to adapt. Ten months ago, OPEC+ member countries therefore reduced their production, keeping about 7 mb/d on the market, or about 7% of world supply.

The objective was to maintain some balance between supply and demand to support the price of a barrel in very strong decline. Saudi Arabia has committed itself in this sense to retain an additional 1 Mb/d. And for the past few months, oil demand has been recovering, inevitably leading to a rebound in oil prices. However, Iraq and Nigeria are alarming about their difficult economic situation.

2021: reversal of supply-demand curves and recovery of oil prices

Finally, the sacrifice made by OPEC+ countries has paid off. Prices have reached their highest level in a year. Oil has become a hot commodity again this month, with Brent crude exceeding $65 per barrel and WTI reaching $60 for the first time in a year. According to Goldman Sachs, maintaining supply as is, or tightening it, would even allow Brent crude to reach $75 per barrel by the end of the third quarter of 2021. Others even predict that within a few years, or even a few months, the price of a barrel of oil could exceed the $100 mark.

In addition, oil prices will rise faster and higher than expected. Rightly so, according to Goldman Sachs, since the recovery in global energy demand is already outpacing OPEC+ supply. In this sense, consumption will return to its pre-virus level by the end of July, and if of course the fight against the coronavirus is successful. In China, demand has already risen above pre-pandemic levels.

This price increase was also helped by the cold snap that swept the United States. As a result, they have lost about 40% of their oil production. Nevertheless, the supply disruption due to the U.S. freeze will not last long enough to cause a shortage.

This turnaround has cast a shadow over OPEC+’s determination to continue to cut production as much as it currently does. What is the strategy to adopt in the face of this rebound? On this point, two OPEC+ countries, Russia and Saudi Arabia, are opposed.

The upcoming negotiations: two ambivalent positions

There is already discord within OPEC+. The last time the organization made a decision on production, it had to make a compromise decision. Indeed, it was necessary to take into account the interests of those who, like Russia, insisted on the end of production limitations.

Relaunch of 500,000 barrels/day until April?

During this summit, which will take place on March 4, two crucial decisions will be taken.

First, the group as a whole will have to decide whether to end the limitations that were put in place to counteract the decline in demand. The choice will be whether or not to restore 500,000 barrels per day, the first step in a gradual recovery of production. This resumption had been agreed upon in December, but was interrupted at the January meeting.

The second issue is the additional one million barrels that Saudi Arabia has been holding back for several months. This voluntary reduction helped eliminate excess inventory. But with the rebound in oil prices, this limitation is being questioned.

On these two points, the Russian and Saudi positions differ.

Russia pleads for increased production

Russia’s position is clear. On February 14, 2021, Russian Deputy Prime Minister Alexander Novak stated that the market was balanced. Although he has not spoken publicly on the subject, Alexander Novak is expected to argue at the March 4 meeting for an increase in production.

He added that while last spring, oil demand was 20-25% below its normal level for this time of year, by the end of 2020, the decline had been reduced to 8-9%. Thus, production should tend to be a little closer to normal.

Saudi Arabia wants to maintain production

Saudi Arabia is taking a different stance and asking OPEC+ members to be cautious. Saudi Energy Minister Prince Abdulaziz bin Salman said the group should remember the “scars” of last year’s crisis. He states in this regard:

“The soccer game is still underway, and it is too early to declare a victory against the virus. “The referee has yet to blow the final whistle.”

For Saudi Arabia, therefore, the return to normal production should not be rushed. Indeed, even after the recent and relative recovery, prices are still below production cost coverage levels. Only a few states could make it in the long run. This would be the case of Saudi Arabia in particular, which benefits from a conventional crude oil that is inexpensive to produce compared to derivatives. At the same time, it gives Riyadh additional leverage over its competitors.

Despite everything, there is always the risk of a stagnating demand. In fact, it will become difficult to absorb the accumulated stocks in the year 2020.

Moreover, according to Bjornar Tonhuagen, analyst at Rystad Energy, if Saudi Arabia no longer holds back the one million barrels as it does today, prices should fall.

Finally, this opposition between the Russians and the Saudis is part of the global context of a rebound in oil prices. The Covid-19 crisis having caused major upheavals. New and extraordinary measures were taken following its occurrence. This raises the question of their sustainability and the consequences for the supply. In fact, some fear a shortage in a few months if demand continues to rise and supply continues to tighten.

Articles qui pourraient vous intéresser