News on January 6, since Saudi Energy Minister Prince Abdulaziz bin Salman took office in August 2019, It has been emphasizing the implementation rate of OPEC’s production cuts, pressuring and reprimanding countries that violate production quotas, and asking them to strengthen production discipline.
He vowed that Saudi Arabia, the largest member of OPEC and the world’s largest crude oil exporter, Free-riding will no longer be tolerated and the burden of balancing oil markets will no longer be borne alone.
On January 5, when he unexpectedly announced a unilateral production cut of 1 million barrels per day – about 10% of current production, what a change!
After the OPEC alliance concluded two days of negotiations, Abdulaziz The prince caught oil markets off guard by revealing the deep production cuts to reporters, which he said was a goodwill gift to other members and the struggling industry as a whole. Additional production cuts will be implemented in February and March.
Oil prices reacted strongly, reaching 10-month highs, additional revenue Countries are expected to be incentivized to stick to quotas or even implement so-called “compensating cuts” – the debt they owe in the deal for previous overproduction.
It said, “This move will help and support friends and colleagues to continue This unprecedented commitment achieves 100% production reduction compliance and helps those countries that are not in compliance to compensate in January, February, March and April.”
Analysts are also speculating whether Saudi Arabia’s intentions are to allow oil prices to rise in the short term or to threaten the world as the coronavirus pandemic surges again. Serious concerns about the future shape of oil demand.
Domestically, Saudi Arabia has slashed its budget due to a sharp drop in oil revenue; Its efforts to diversify its economy have yet to take root.
At the same time, oil consumption is still affected by the epidemic. The United States, the world’s top oil consumer, imported 0 tons of Saudi crude oil in the week ended January 1, the first time the U.S. Energy Information Administration has tracked data since 2010, a potentially troubling sign that Saudi Arabia usually It is one of its main suppliers in the United States.
Maintain consistency among member states
Prince Abdulaziz said the move was a “pre-emptive strike” to prevent the epidemic from worsening and causing market disruption in the coming months. decline, he is not worried about the current demand situation.
But this can also backfire and be seen as a reward for quota cheating.
According to calculations by OPEC analysts, from May to November, 5 OPEC The total output of member countries and six non-OPEC countries exceeds the upper limit by 2.461 million barrels per day. The most blatant one is Russia, which has a production surplus of 604,000 barrels per day.
Under the agreement, Russia will be allowed to increase production by 65,000 barrels per day in February The quota was increased by 65,000 barrels per day in March.
Kazakhstan is the only country among OPEC members that has received a production increase quota, increasing production by 1 million barrels per day, currently exceeding the quota by 213,000 barrels per day.
Other members of the OPEC alliance will be asked to maintain January levels. Many member states have also sought to relax quotas but have been rejected.
Despite his harsh words against quota cheaters, Abdul Prince Le-Aziz has largely been tolerant of Russian transgressions. This may reflect the reality that if Russia, one of the world’s three largest crude oil producers, is ousted, the influence of the OPEC alliance will be greatly reduced.
PVM Associates analyst Stephen Brennock said: “Saudi Arabia is actually giving up market share. The decision represents its surrender to Russia’s request to boost production.”
Different priorities
For its part, Russia cannot stop Saudi willpower.
On December 19, in Saudi Arabia and Russian Deputy Prime Minister Alexander Novak (Alexander Novak) Prince Abdulaziz revealed his plans for additional production cuts while keeping them secret from other OPEC members.
Novak demurred, saying higher oil prices would only fuel U.S. shale Oil rivals returned to the market but the prince told reporters it was a “political and sovereign decision”.
The production cuts will support oil prices through the seasonal demand slump in the first quarter, while The backwardation in the Brent crude futures structure could cause crude inventories to fall, reducing excess inventories, as long as refinery operations can be maintained.
In addition to potential OPEC quota cheating, more crude oil may enter the market from Libya as Libya undergoes years of Iran is reviving its oil industry after the war, and Iran is already anticipating the easing of sanctions after U.S. President-elect Joe Biden takes office on January 20.
The OPEC alliance will meet again on March 4 to decide on quotas for April . The coming weeks will determine whether Saudi Arabia’s new approach will bring the benefits and OPEC unity it hopes for.
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