Caution and vigilance the name of the game at OPEC+ ministerial meeting
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Oil prices have been on fire since the fall, with Brent appreciating by more than 70 percent since November. January and February saw the biggest rally during the first two calendar months of any year in the history of the commodity.
This followed the greatest decline in demand in history, as nations responded to the start of the pandemic by going into lockdown and suspending cross-border travel — WTI even turned negative for a day in mid-April last year.
We have come a long way since then in terms of the oil markets rebalancing. OPEC+, the alliance of 13 OPEC nations and 10 friendly countries led by Russia, is to be credited for this success story.
The outcome on Thursday of the latest ministerial meeting turbocharged that rebalancing by leaving the existing production cuts in place, except for Russia and Kazakhstan who were given permission to increase their production by a combined 150,000 barrels per day (bpd) in April. This leaves the OPEC+ cuts at historic levels above 6.8 million bpd.
Saudi Arabia also agreed to roll over its voluntary one-time cut of 1 million bpd to April. This decision put a rocket under prices, with Brent powering to more than $67 a barrel and WTI beyond $64.
Ahead of the meeting there were two schools of thought, as has become usual in recent times. Saudi Arabia advocated caution while Russia promoted a tapering of the existing production cuts.
OPEC countries fell in line with the view of the Kingdom. In his opening remarks to the meeting, Saudi Energy Minister Prince Abdul Aziz bin Salman made an urgent plea for “caution and vigilance.” He reminded delegates that it was important to avoid complacency and not to take the tightening of the oil markets for granted — points he reiterated time and again during a press conference after the meeting.
Several analysts are concerned about tightening oil markets and the inflationary pressures of rising commodity prices. However they should be aware that the new monthly schedule of ministerial meetings will allow OPEC+ to react swiftly should prices climb too fast.
Cornelia Meyer
The Saudi reasoning is understandable because economic recovery has been spotty with Europe, and to a lesser extent the US, still at various stages of lockdown. The implementation of vaccination programs, while successful in some countries such as Israel, the UAE, Saudi Arabia, the UK and the US, has been patchy and slow in others. Prince Abdul Aziz had a point when he emphasized the link between the successful roll out and uptake of the programs and sustainable economic recovery.
Russia is in a different position from Gulf Cooperation Council (GCC) countries. Deputy prime minister Alexander Novak pointed out in mid-February that a price for Brent of about $63 a barrel is acceptable to Moscow. Russia’s requirements for balancing its budget are different from those of nations in the GCC. Russian producers also keep lobbying the Kremlin to put incremental barrels on the market, which constitutes a domestic pressure.
But while crude markets are heating up, as evidenced by strengthening backwardation, caution remains the order of the day for OPEC+.
So far, east of Suez has recovered more quickly from the pandemic than west of Suez, with China’s consumption now surpassing prepandemic levels. This week highlighted two examples that validate a cautious and vigilant approach, and underline the need not to take the speed of economic recovery for granted: the February manufacturing Purchasing Managers’ Index in China disappointed at 50.6, and the commercial crude inventory build in the US for the week ending Feb. 26 was, at 21.6 million barrels, much larger than expected.
Prince Abdul Aziz stressed time and again during the press conference that he only believes growth projections when they actually materialize and not before. This also applies to the effects of a $1.9 trillion US stimulus package that has yet to pass the Senate.
Several analysts are concerned about tightening oil markets and the inflationary pressures of rising commodity prices. However they should be aware that the new monthly schedule of ministerial meetings will allow OPEC+ to react swiftly should prices climb too fast.
The next ministerial meeting will take place on April 1. The organization will have to look at macroeconomic developments and put them in the context of refineries that are coming out of seasonal maintenance, which will constitute an impetus for demand.
By then we also will have more information about the progress of vaccination programs and, hopefully, the easing of lockdowns and travel restrictions. Until then we may have to live with a tighter market, which will inform how quickly Organization for Economic Co-operation and Development stocks will revert to their five-year average, which is a key metric for OPEC+.
• Cornelia Meyer is a Ph.D.-level economist with 30 years of experience in investment banking and industry. She is chairperson and CEO of business consultancy Meyer Resources. Twitter: @MeyerResources
