Saudi Arabian Energy Minister Abdulaziz bin Salman (R) is portrayed with his Russian counterpart Alexander Novak when they arrive for a meeting of the Saudi-Russian Joint Committee on December 19, 2020.
FAYEZ NURELDINE | AFP | Getty Images
LONDON – A group of some of the world’s most powerful oil producers will hold a crucial meeting on Thursday to discuss reversing some of the production cuts made last year.
OPEC and its non-OPEC partners, an energy alliance sometimes called OPEC +, will meet via videoconference in an attempt to reach consensus on how to manage supply to the market.
The group agreed last year to restrict the amount of oil it produces in an effort to sustain oil prices, as stringent public health measures coincided with an unprecedented fuel demand shock.
This week’s supply decision comes at a time when oil prices have returned to pre-virus levels, U.S. production has been hit by freezing storms and the coronavirus pandemic continues to cloud the outlook.
OPEC’s de facto leader, Saudi Arabia, has publicly encouraged allied partners to remain “extremely cautious” in production policy, warning the group against complacency as it seeks to navigate the ongoing Covid-19 crisis.
Russia, which does not belong to OPEC, however, has indicated that it wants to move forward with an increase in supply.
Analysts generally expect OPEC + to increase production from current levels, but doubts remain as to exactly how much and which countries will be affected.
At an industry event last month, Saudi Arabia’s energy minister, Prince Abdulaziz bin Salman, told those trying to predict the next move of the energy alliance: “Don’t try to predict the unpredictable.”
Both Saudi Arabia and Russia ‘will get what they want’
Tamas Varga, an analyst at PVM Oil Associates, told CNBC over the phone that he believed that OPEC and non-OPEC partners had done an “incredible job” in rebalancing the market.
However, while global demand for oil is recovering, he warned that the recovery is still “very, very fragile”.
“What really matters here is Russia and Saudi Arabia. The break-even price for Russia’s budget is much lower than that of Saudi Arabia, so you will see a kind of gap in the opinions between these two countries,” said Varga .
OPEC + initially agreed to cut oil production by a record 9.7 million barrels a day last year, before slashing cuts to 7.7 million and eventually 7.2 million from January. Saudi Arabia, the head of OPEC, has since taken voluntary cuts of 1 million from early February to March.
An oil pumping monkey, also known as a “shaking donkey”, in an oil field near Dyurtyuli, in the Republic of Bashkortostan, Russia, on Thursday, November 19, 2020.
Andrey Rudakov | Bloomberg | Getty Images
Alexander Novak, the deputy prime minister of Russia, seemed to signal Moscow’s intention to increase supply last month, saying the market was already balanced.
“Russia wants to get back to normal production as soon as possible, while Saudi Arabia wants to enjoy high prices a little more and prefers to keep the market on the tight side than on the loose side. We believe that both will get what they want,” Bjarne Schieldrop , chief commodity analyst at SEB, said in a research note.
Russia is likely to be allowed to further increase production, he added, while Saudi Arabia will return “part or potentially all” of its unilateral cut of 1 million barrels a day.
Analysts expect OPEC + to discuss releasing up to 1.3 million barrels a day back to the market on Thursday.
Russia will gain momentum in its market outlook, but we do not see a complete change.
Louise Dickson
Analyst at Rystad Energy
“Saudi Arabia’s statements indicate that they are on the cautious side. Instead of keeping it a little tight a little more than having an oversupply before the Covid-19 vaccines really worked their magic on global economic activity and demand for oil, “he said. Schieldrop said.
“The next OPEC + meeting, therefore, should not ruin the oil part in relation to the April supply, as the total result is likely to leave the market a little short, rather than a surplus.”
OPEC + is not yet ready to change course
International benchmark Brent oil futures traded at $ 63.01 a barrel on Tuesday morning, almost 1.1% lower, while US West Texas Intermediate (WTI) oil futures stood at $ 60.02 , drop of more than 1%.
Oil prices, having risen to a 13-month peak last month, appeared to extend the losses that started last week with expectations that OPEC + could increase global supply.
“Our expectation is that they will grow in line with the previous policy agreement, announced in December 2020. And that is not to increase production by more than 500,000 barrels per day. We hope that this policy is still valid, ”said Louise. Dickson, an analyst at Rystad Energy, told CNBC by phone.
The Organization of Petroleum Exporting Countries (OPEC) logo at headquarters.
Omar Marques | LightRocket | Getty Images
She added that OPEC could, in theory, increase production by 1.3 million barrels per day, but “we don’t think they will exceed this time”.
“Russia is going to gain momentum in its market vision, but we don’t see a complete change. Last year, OPEC + was really under the reins of Saudi Arabia, guiding politics, making decisions, giving orders, and I don’t think that , after a year of such market and supply diligence, the group is ready to change course only on a whim of $ 65 Brent or an increasingly tight oil market, “she said.