Global oil heavyweight Saudi Arabia surprised OPEC+ by announcing a unilateral 1 million barrel per day output cut covering February and March.
Saudi Arabia will hold its February and March crude production to 8.119 million b/d, well below its quota of 9.119 million b/d, to help bring down oil inventories that had bloated from the pandemic, energy minister Prince Abdulaziz bin Salman said January 5, after two days of OPEC+ talks.
“We do that with the purpose of supporting our economy, the economies of our friends and OPEC+ countries, and for the betterment of the industry at all levels,” he said in a post-meeting press conference.
The cut is unilateral, with no other countries following suit. It will more than offset modest rises granted to Russia and Kazakhstan after hard-won negotiations. Those two countries will be allowed to boost their production by a combined 75,000 b/d in February and another 75,000 b/d in March, with all other OPEC+ members holding their quotas steady from January.
Novak lauded Saudi Arabia’s “great contribution,” saying the country “is playing a major role in ensuring a normal level of stocks on the market.”
The move returns Saudi Arabia, for two months at least, to its status as the world’s primary swing producer, after Prince Abdulaziz had long insisted that other OPEC+ members share the burden.
The prince dismissed concerns that the cut would benefit US shale rivals and said it was not only a goodwill gesture to other members of the alliance but also a “preemptive measure,” in case global oil demand worsens from rising coronavirus cases.
“Attending to these things earlier will give much better room to maneuver later on,” he said. “We are all hoping that these so-called lockdowns that have taken place recently will be reduced hopefully in the next month or so, and the world economy will continue improving. We’ve tried to preempt daunting stock levels that we need to reduce.”
“New Year’s Gift”
The news juiced oil prices, with front-month Brent futures jumping almost 5 percent to US$53.53 per barrel.
And it came as a pleasant shock to many OPEC+ members, who were left in the dark on Saudi Arabia’s announcement until Prince Abdulaziz revealed the cut to reporters after the meeting.
Russian Deputy Prime Minister Alexander Novak called the cut “a New Year’s gift” to the oil market, blowing away expectations that the OPEC+ alliance would merely roll over its collective output ceiling.
Delegates said the prince had hinted a unilateral cut might be coming, telling ministers he had “a fantastic proposal in my pocket,” but had not said what the volume would be.
But the special dispensation given to Russia and Kazakhstan to raise production raised some eyebrows, as they were two of the least compliant members with their quotas. As of the end of November, Russia had overproduced its cap by a cumulative 609,000 b/d, the most in the coalition, while Kazakhstan was 213,000 b/d over.
Those two countries had lobbied hard for the OPEC+ alliance to collectively increase its output by 500,000 b/d to recapture market share amid expectations of a global demand recovery from the pandemic.
Under the agreement, their rises will be about half the amount that would been allowed under their original proposal.
The UAE initially backed the Russian proposal for a production rise but later fell in line with Saudi Arabia and most other OPEC+ members who favoured rolling over all quotas, given the slow ramp-up of vaccines and the renewed lockdown measures imposed by several countries to contain the resurgent virus, delegates said.
Russia and Saudi Arabia, as the two largest OPEC+ members, had shared the same quota since the current deal was implemented in May, but now their paths will diverge significantly.
“Russia was allowed to get away with increasing oil production and together with Kazakhstan, it is making the chronically un-compliant OPEC+ members the clear winners of this meeting,” said Bjornar Tonhaugen, an analyst with Rystad Energy.
Novak said the OPEC+ pact had always assumed a gradual production rise over the coming months, and that Russia sought to “do it smoothly, considering the situation of the market.”
He appeared far more bullish than other OPEC+ ministers.
“We’re seeing a recovery in the market, despite all uncertainty and lockdowns, which are not as harsh as they were and are not having as significant an impact on mobility and demand,” Novak told reporters. “We need to consider current situation, monitor the situation and bring back production.”
S&P Global Platts Analytics said Russia’s reluctance to be tied down to stark quotas could make future OPEC+ meetings increasingly difficult, but even with the slight rise in the deal struck, Russian crude supply through March will remain more than 1 million b/d below April levels – when a brief price war erupted with Saudi Arabia.
“Eventually, Russia’s determination to protect market share, when combined with the potential price impact on other non-OPEC supply, could become problematic to OPEC+ cohesion if Saudi cuts sustain US$50/b Brent,” Platts Analytics said in a note.
Managing an Uncertain Market
The OPEC+ alliance, which controls roughly half of world crude production, implemented production cuts totalling 7.2 million b/d in January and was planning on adjusting quotas monthly as market conditions warrant.
The agreement now locks in quotas through the first quarter, with the group’s next meeting set for March 4 to set April levels.
An advisory committee co-chaired by Prince Abdulaziz and Novak that assesses member compliance and reviews market outlooks will convene February 3 and March 3.
Including the extra Saudi cut, the 19 members with quotas under the OPEC+ agreement will see their total production capped at 35.728 million b/d in February, an 8.125 million b/d cut from October 2018 levels.
For March, the ceiling will edge up to 35.803 million b/d, an 8.050 million b/d cut. Libya, Iran and Venezuela remain exempt from quotas.
