Opec+ Meeting Decision Boosts Crude Price
The virtual meeting of Opec oil ministers and some from other, co-operating countries – collectively Opec+ – held January 4-5 saw Saudi Arabia take a bigger share of the cuts as output elsewhere gradually rises over the coming months. The effect was a sudden rise in crude prices and the US benchmark crude, West Texas Intermediate, rose above $50/barrel. Oil company share prices also benefited.
Norwegian consultancy Rystad Energy said the news had gone down well in the US, as the Saudi "gift" had helped put a floor beneath prices. "Expect to see upside surprises to shale output for the third cycle in a row, which is the ever-lasting dilemma of Saudi oil market balancing," it said.
The more Saudi Arabia reins in its own output, the more market share it risks giving to rival producers in the US as prices rise. And along with higher crude output, there comes more associated gas from some of the major shale plays such as the Permian.
Russia had been among those pushing for a rise in output: Rystad said that to not boost output would "create lasting damage to its production capacity."
Opec said the meeting "highlighted the unprecedented events of 2020 and the shocking impact of the Covid-19 pandemic on the world economy and markets." It commended the alliance for "undertaking the largest and longest crude oil production adjustments in history in response to the exceptional challenges and market conditions caused by the pandemic."
Although it said "market sentiment has been buoyed recently by vaccine programmes and improved asset markets" and that there had been a high degree of compliance regarding member countries' output cuts, it warned of poor refining margins, the high stock overhang and other underlying uncertainties.
The meeting acknowledged the need to gradually return 2mn barrels of oil/d to the market, with the pace being determined according to market conditions. January 2021 production will go up by 0.5mn b/d, meaning the production reduction falls from 7.7mn b/d to 7.2mn b/d. This reduction will fall to 7.125mn b/d in February and 7.05mn b/d in March.
Between May and November last year, Opec+ contributed to reducing the global supply by some 1.9bn barrels, including voluntary adjustments, and this has been key to the rebalancing of the market, Opec said.