Oil prices reached their highest level since February 2020 this week after Saudi Arabia’s surprise announcement at the monthly OPEC+ ministerial meeting that it would voluntarily cut an additional 1 million barrels per day from its oil production.
This additional reduction -by the group’s only real swing producer- more than offsets the production increases granted to Russia and Kazakhstan, and is a completely different result than analysts and industry experts had expected.
Saudi Arabia and Russia – the two most powerful members of the OPEC+ alliance – disagreed on how to respond to the changing oil market and falling demand. Russia fears that the U.S. shale could benefit from any decline in OPEC+ members’ production. And this is not entirely untrue. Russia is focusing on market share.
Saudi Arabia, on the other hand, is focusing on prices. Although the word “price” is never used. Instead, the term “market balance” or “restoring market balance” is preferred. With Saudi Arabia cutting a million barrels a day, two things are clear: 1- The Saudis are experiencing a market slowdown, probably due to the refinery maintenance season in Asia and a new wave of lockouts due to the new, more virulent strain of Covid-19, and none of the other producers can afford (or want) to cut production further.
2- While Saudi Arabia remains the most powerful member of OPEC, its power is being diluted by Russia. Meanwhile, the inclusion of Russia in the group gives more power to OPEC as a whole.
For Saudi Arabia, this reduction will come at a high cost. While prices have risen by nearly $3 a barrel, the Kingdom will still lose about $34 million a day with 1 million fewer barrels exported. So, for Saudi Arabia, it is unlikely that it thinks prices will rise enough to compensate for the lack of exports. On the contrary, it is more likely that it is betting that prices will actually fall due to even greater market saturation if it does nothing. For the oil markets, the thought that Saudi Arabia fears that this will worsen should be a cause for concern.
The fact that Russia is not willing to reduce production with Saudi Arabia (and has even been allowed to increase production) shows the new power Russia has in the oil markets. No one can afford a repeat of March 2020, when the battle between Saudi Arabia and Russia over production cuts brought oil prices down sharply. In the game of who will blink first, it looks like Russia has won this round.
by Xavier Cuesta – European Correspondent – VN