The oil price bull rally seems to have found firm feet, having earlier threatened to stutter. The unprecedented Opec meeting which threatened to end in a stalemate, later proved to be the very catalyst international oil prices needed to break the strong resistance at the $50/bbl barrier. Saudi Arabia stepped in with an unusual one-sided commitment in an effort to keep the market balanced.
The rifts in two biggest suppliers in the Opec Plus group appeared visible as Russia showed stern resistance on not agreeing to further production cuts, and instead insisted on production increase. Other prominent players also followed, and the result was moving towards a slight increase in overall production.
Russia has been a largely compliant partner in the historic production cut and freeze deal but was fast losing patience, as the US shale producers gained on the market share. Saudi Arabia and Russia currently hold varying outlooks on the pandemic, with Russians more optimistic on the demand recovery being swift. Saudis, on the other hand, expect demand to stage a much slower recovery as much of the world is still battling with the pandemic, even with hopes of a viable vaccine around the corner.
Recall that Saudi Arabia had previously stuck with not acting alone policy, and the unilateral decision to cut down the production by a sizeable 1 million barrels a day for February and March is a big departure from the earlier stated position. Saudi Arabia has further strengthened its position as the real swing producer in the oil market and shows the extent to which the Kingdom is willing to go to keep the market near any semblance of balance.
The oil market responded with a sharp 5 percent single-day surge in both WTI and Brent prices, as it came at the very last minute when Opec Plus was believed to be on the brink of disbanding. The production cut voluntarily offered by Saudi Arabia may well only have short-term implications, but it does alter the entire structure of the Opec Plus group. Previously, Russia’s stern stances would mean Saudis would not act alone. This has all changed now and should reduce the compliance and continuity risk premiums associated with oil.
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