OPEC+ Oil Strategy Success Buys Time Before Tough Choices – is Russia going after US Shale?

Saudi cuts buoy prices yet Russia fears U.S. shale comeback Iran could revive exports with new accord but obstacles remain

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OPEC and its allies can celebrate their success in buoying world oil markets when they gather this week. But the coalition will soon be faced with some tough choices.

Last month’s pledge by Saudi Arabian Energy Minister Prince Abdulaziz bin Salman to slash production by a further 1 million barrels a day has buttressed global markets against the latest onslaught from the pandemic. A price rebound to $57 a barrel in London is shoring up the producers’ revenues.

UAE-ECONOMY-OIL-ENERGY

Prince Abdulaziz bin Salman al-Saud

Photographer: Karim Sahib/AFP/Getty Images

While that relieves OPEC+ of any need to adjust policy on Wednesday, it’ll need to start considering how long to restrain output — a calculation clouded by the potential return of supply from fellow member Iran.

At the heart of the dilemma is a fundamental tension between the Saudis and their most critical partner in the alliance, Russia. While Riyadh has sought higher prices to cover government spending, Moscow — without the same pressures — agitates to claw back market share.

“Prince Abdulaziz bin Salman’s doctrine that you err on the side of caution has been vindicated,” said Helima Croft, chief commodities strategist at RBC Capital Markets LLC. On Wednesday, “we might get the contours of the arguments that will be made next month.”

Delicate Cuts

The Organization of Petroleum Exporting Countries and its partners have resolved this year to restore some of the 7.2 million barrels of daily output — roughly 7% of global supplies — they continue to idle after making vast production cuts when the pandemic erupted last spring.

The restrictions have proved effective, turning around an oil market that last April briefly saw prices plunge below zero in New York, and throwing a financial lifeline to producers around the world — from tiny African states to corporate giants.

Restoring the halted production, however, is turning out to be a delicate process.

OPEC’s Planned Output Increase Tempered by Troubled Producers

Although OPEC+ is scheduled to revive a total of 2 million barrels a day this year, it agreed a two-month pause after the first 500,000-barrel installment in January as new virus infections menaced fuel demand. Riyadh doubled down on the curbs by announcing an extra 1 million-barrel cutback of its own.

On Wednesday, a panel that oversees the alliance’s strategy — the Joint Ministerial Monitoring Committee — will convene online to assess the outlook. The JMMC is unlikely to recommend new policies, which will instead be tackled at the next full OPEC+ meeting in early March, according to delegates who asked not to be identified.

“The Saudi cut has bought OPEC+ some time,” said Bill Farren-Price, a director at research firm Enverus and veteran observer of the cartel.

The question of what to do next will loom over their discussions on Wednesday.

Prince Abdulaziz’s preference for keeping output constrained has been validated by a bumpy roll-out of vaccines, and renewed lockdowns in key consumers such as China. Major oil traders agree the market won’t fully recover until air travel picks up, sometime in the third quarter.

Shale Dilemma

Russia on the other hand fears that supporting prices too long will backfire, provoking investment in U.S. shale oil and a flood of new supply that will negate OPEC+’s hard work. At last month’s meeting, Deputy Prime Minister Alexander Novak proposed a production increase, and tried to dissuade the Saudi Prince from his unilateral cut.

Oil's Super Thursday at 177th OPEC Meeting

Alexander Novak

Photographer: Stefan Wermuth/Bloomberg

“It is going to be a hell of fight at the OPEC+ March meeting,” said Helge Andre Martinsen, senior oil market analyst at DNB Bank ASA. “Russia will consider it a massive failure if OPEC+ cuts starts to stimulate growth in U.S. shale again, while at the same time they’re sitting on plenty of spare capacity.”

Russia isn’t the only member that might push for relaxing the curbs.

Iraq is in the grip of an economic crisis and desperately needs the revenues that would come from higher oil sales. The United Arab Emirates is seeking to promote a benchmark oil contract that depends on plentiful output, and last year briefly broke ranks with Riyadh to open the taps.

Then there’s the complication of Iran.

President Joe Biden is seeking to reactivate a nuclear agreement that would lift U.S. sanctions on the Islamic Republic, allowing the return of almost 2 million barrels of daily output. With the end of the “maximum pressure” campaign waged by former President Donald Trump, Iranian exports have already crept higher.

Still, Secretary of State Antony Blinken says an agreement remains a “long way” off. As the two sides jockey for leverage — and Tehran presses on with uranium enrichment — they could be headed for a new rupture rather than reconciliation, according to RBC’s Croft. Instead of extra barrels, markets may need to brace for “a geopolitical tremor,” she cautions.

But if a deal is struck, OPEC+ will need to choose between cutting output further, or seeing their efforts to drain surplus oil stockpiles founder. It’s unclear how readily Saudi Arabia would make way for the comeback of its political nemesis.

“Iran’s export hike is another emerging challenge for OPEC+,” said Farren-Price. “It’s one they may need to factor into their plans sooner rather than later

Bloomberg

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Stuart Turley is President and CEO of Sandstone Group, a top energy data, and finance consultancy working with companies all throughout the energy value chain. Sandstone helps both small and large-cap energy companies to develop customized applications and manage data workflows/integration throughout the entire business. With experience implementing enterprise networks, supercomputers, and cellular tower solutions, Sandstone has become a trusted source and advisor.   He is also the Executive Publisher of www.energynewsbeat.com, the best source for 24/7 energy news coverage, and is the Co-Host of the energy news video and Podcast Energy News Beat. Energy should be used to elevate humanity out of poverty. Let's use all forms of energy with the least impact on the environment while being sustainable without printing money. Stu is also a co-host on the 3 Podcasters Walk into A Bar podcast with David Blackmon, and Rey Trevino. Stuart is guided by over 30 years of business management experience, having successfully built and help sell multiple small and medium businesses while consulting for numerous Fortune 500 companies. He holds a B.A in Business Administration from Oklahoma State and an MBA from Oklahoma City University.