LAST Tuesday, the OPEC reached an agreement that can be considered strange in terms of its outcome. It decided that Saudi Arabia will take sole responsibility to unilaterally reduce one million barrels of production per day from next month, and to allow Russia and Kazakhstan to jointly increase production by 75,000 barrels per day.
OPEC+ did not agree or reach an agreement to increase production by 500,000 barrels per day from next month as decided previously. The concern was that oil consuming countries are not ready for additional barrels to enter the market at a time when uncertainties surround the oil market. This is because there are just too many oils available in the market, and the demand is neither there nor forthcoming yet.
It will take some time to have the vaccine distributed globally in order to resume free movement and travel. As a result, oil markets will remain fragile and the Saudi point of view prevails. There is no need to increase oil production and pour more oil for the next few months. Let’s finish all the excess oils in various storage facilities.
The better option would have been to let Russia go ahead with its demand to increase production or to agree to an increase of 500,000 barrels, and for Saudi Arabia to abstain from participation for the next two months for instance, instead of taking the burden of solely cutting one million barrels per day for the next two months. Oil prices jumped and hit $ 54 a barrel.
However, for how long will that remain? Will it go down slightly with the coming of USA shale oil? Such a level is comforting to the producers to invest close to $ 60 billion for bringing up more volume and exceeding US oil production to 13 million and more, as at $ 40 per barrel, less than $ 35 billion will be invested.
Therefore, the latest OPEC+ decision certainly benefited other producers. The likes of US shale and others will not hesitate to eat into OPEC+ share that Russia is very much bothered about. Iraq and Nigeria will be looking for some sort of escape away from full restriction, to enjoy the income of $55 per barrel for a while. Certainly, the current level of $ 55 per barrel will not last long, as corrections are bound to happen, reflecting poor global demand weakness, with the continued surge of the pandemic and increase in the number of victims. Saudi Arabia has taken the unusual resolution of volunteer cuts for the next two months.
Needless to say, such an unusual step is not identical to the role of swing producer – to stay away from this, it took years.
By Kamel Al-Harami Independent Oil Analyst