The Organization of Petroleum Exporting Countries and key partners will extend most of the current production cuts, causing oil prices to skyrocket on Thursday.
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Most OPEC + members will continue with current production quotas in April, including Saudi Arabia’s previous decision to reduce 1 million barrels per day of its own production. Russia and Kazakhstan have exceptions and may increase production by 130,000 bpd and 20,000 bpd, respectively, “due to continuous seasonal consumption patterns”.
“The Saudi decision to extend its voluntary cut of 1 million bpd was shocking, as it leaves them vulnerable to losing market share next month, when the oil market is in deficit by a few million barrels,” wrote Edward Moya , Oanda market analyst in a note. “This result was not expected and practically guarantees a tight market during the summer.”
Market analysts originally expected the group to approve a 1.5 million bpd increase in production, with Saudi Arabia ending its extra cut of 1 million bpd.
But Saudi Arabia can start bringing production back gradually in May. OPEC + will meet again on April 1.
Oil prices soared with the news. Brent futures were up 4.5% to $ 66.96 a barrel. Crude oil prices in the US jumped 4.6% to $ 64.10.
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Oil prices raise energy stocks
Exxon Mobil (XOM) shares rose 2.7% to 58.07 in the stock market today, giving up previous gains. Chevron (CVX) rose 0.9% to 104.48. EOG Resources (EOG) went up 5%.
Saudi Arabia has urged OPEC + not to rush into recent meetings, even with the emergence of good news in front of the pandemic.
Energy Minister Prince Abdulaziz bin Salman said, “There is no doubt that the global oil market has improved since our last meeting in January,” in his opening speech at the OPEC meeting. The group has been called OPEC + in recent years, with the addition of Russia and the main producers.
But he also warned that the group demonstrates “caution and vigilance”.
At the December OPEC + meeting, Prince Abdulaziz said that Covid’s vaccines add hope, but also uncertainty to the oil markets, because “it is a little unknown” how many people will get the vaccine.
An increase in demand and oil prices depends on the rates of the Covid-19 vaccine. Vaccines are being launched at a faster rate and the United States has approved the Johnson & Johnson (JNJ) filmed over the weekend. But most adults in the United States will not be vaccinated until this spring. In the meantime, the EU will not reach 70% vaccination levels until mid-summer.
Even with important indicators, such as the launch of the vaccine, Prince Abdulaziz wants to see global stocks shrink to the levels observed in 2015-2019.
With production cut extensions and an inventory focus, energy consultancy Wood Mackenzie sees Brent oil prices hitting $ 70- $ 75 a barrel in April.
“The risk is that these higher prices will dampen the attempt at a global recovery,” said Ann-Louise Hittle, vice president of the consultancy, in a statement. “But the Saudi Arabian energy minister is adamant that OPEC + must be on the lookout for concrete signs of an increase in demand before starting production.”
OPEC + Impact on US shale
OPEC + members have a delicate balancing act of supporting oil prices enough to finance government coffers, without seeing oil prices rise enough to trigger a huge increase in U.S. shale production.
But the group seems to think that the growth of shale in the United States is losing momentum.
“Drill, baby, drill, it’s over forever,” said Prince Abdulaziz during the press conference after the meeting, targeting U.S. shale producers. “I think that all producers have learned this hard lesson, how to discipline themselves to ensure that the well-being of the company and shareholders” is maintained, he said.
But American producers have found new ways to extract profits from shale rock before.
Devon Energy (DVN) set a capital expenditure budget of $ 1.8 billion this year, close to the 2019 spending levels. Last month, Continental Resources (CLR) has established a capital expenditure budget of $ 1.4 billion. This is above its preliminary budget in November of $ 1.2 billion – $ 1.3 billion.
EOG Resources said its dividend and capital spending plan could be financed by free cash flow, even if WTI crude falls below $ 40 a barrel.
“We continue to move forward in our exploration efforts and are allocating more capital in 2021 to test high-impact oil exploration and lease areas,” said CEO Bill Thomas in the February fourth quarter earnings release. “While much of the industry is slowing down or abandoning exploration, we are confident that our pipeline of new high-return games can significantly increase the long-term value of EOG and we are aggressively pursuing them.”
Follow Gillian Rich on Twitter for energy news and more.
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