After months of negligence on the part of traders, oil has become a hot merchandise again this month, with Brent raising more than $ 65 a barrel and WTI topping $ 60 a barrel for the first time in a year. The demonstration cast a shadow over OPEC + ‘s decision to continue cutting the same production it is cutting now. Oil was recovering steadily, even before the United States lost about 40% of its production due to the arctic cold wave that swept the country. Texas’s deep freeze certainly helped, but its effect is already diminishing as traders make profits: Brent dropped to less than $ 63 at the time of this writing, and WTI fell to less than $ 60 the barrel. However, substantial appreciation potential remains that could increase internal tensions among OPEC + members.
On the one hand, American demand for oil is recovering. The recovery, reports Bloomberg, began with the vaccination campaign that began in December and, since then, refineries have increased fuel production. The past few weeks have visa Gasoline inventories increase, but so does production.
While demand from the world’s largest oil consumer is recovering, production is stagnant. According to the EIA, U.S. production will also remain below 12 million bpd next year. This imbalance will turn the United States into a net exporter this year and next year, EIA said in its last Short-Term Energy Perspective. But, more importantly for OPEC +, it would push oil prices further upward, tempting members who barely fulfilled obligations to become even less compliant.
There is already discord within the extended oil cartel. The last time that 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 step back from deeper production cuts. And now, Saudi Arabia has said it would suspend its additional voluntary unilateral cuts that totaled 1 million bpd and that Riyadh has done in its search for everything it needs for higher prices.
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This is the clearest sign that OPEC’s de facto leader and largest producer is becoming more optimistic about prices. According to the Wall Street Journal report that broke the news, however, the decision could still be reversed if the price situation changes. Ironically, the very news that Saudi Arabia will add another million barrels a day to the global supply is likely to have a negative effect on prices once the Texas freezing frenzy runs out.
But while Saudi Arabia remains ready to do whatever it takes, Russia sees the oil market already rebalanced. Deputy Prime Minister Alexander Novak said both last week and 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 TV channel Rossiya 1. Novak added that, although last spring the demand for oil was 20-25 percent below the normal level at this time of year, at the end of 2020, the decline has shrunk to 8-9 percent. And Russia remains one of the nations that hardly adheres to the OPEC + agreement. In fact, like Iraq, Russia has been producing beyond its quota.
Speaking of Iraq, the country reported an increase in oil exports in the first two weeks of February, despite its attempt to reduce crude oil production even more to make up for overproduction last year. For the entire 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 is Iran, which is already driving production, since it is exempt from OPEC + cuts and has big plans for its return to the international oil scene after the lifting of US sanctions. That hasn’t happened yet, after Washington tied the removal of sanctions on Iran’s suspension of uranium enrichment activities.
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In what can be seen as a gesture of goodwill, the US earlier this month said had rescinded a statement from the Trump administration that all UN sanctions against Iran had been reversed. The declaration was void because it used provisions of the 2015 nuclear agreement with Iran that the US had abandoned before making the declaration. In any case, Iran has reason to be optimistic that it will soon be free of sanctions and ready to pump more.
The discord between production hawks and production growth pigeons within OPEC + will only deepen with the latest bullish oil news. This has already prompted Saudi Arabia’s oil minister to warn against complacency.
“I must warn once again against complacency,” said Prince Abdulaziz bin Salman earlier this week as quoted by Bloomberg. “The uncertainty is very great and we have to be extremely cautious. The scars from last year’s events should teach us to be cautious. “
The uncertainty does remain high, and there is a threat that American producers will yield to the temptation of WTI for more than $ 60. For now, they have resisted, in all fairness, perhaps exhibiting the same caution that Bin Salman spoke of this week. But at some point, the temptation may become overwhelming, and what for OPEC is a nightmare scenario may happen again: American producers increasing production thanks to OPEC + efforts to keep prices high enough to make it economical.
For now, there are no signs that OPEC + will depart from its current policy of cutting 7.2 million bpd by April. But then again, as Saudi Arabia’s leading oil man said, “Those who are trying to predict the next movement of OPEC +, for those I say, don’t try to predict the unpredictable.”
By Irina Slav for Oilprice.com
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