No one saw it coming. Not even the most bullish of observers. What Opec plus alliance threw last week is well and truly a surprise. This comes after Saudi Arabia signaling the previous settings to continue for the rest of the year. After Russia’s production cut in February 2023 after Western sanctions, Opec Plus was not scheduled to meet till June. But Saudi Arabia apparently did not enjoy the sight of Brent in the mid-70s/bbl.
The 1.16 million barrel per day production cut will be led by Saudi Arabia with almost half the share, followed by Iraq and the UAE. Recall that it was not more than a month ago when the Western media was peddling rumors that the UAE is mulling to quit the cartel. That also led to a mini bear run and needed denial from the top energy officials of the UAE. The UAE’s strong presence in the recent production cut sends the West a strong signal of unity amongst Opec plus members.
The US Administration has not minced words in condemnation of the abrupt production cut, but there is only this much the US can do. The world order may not be shifting as swiftly as it did after the Soviet collapse, but the shifts are there for everyone to see. Saudi Arabia has now stood firm on her stance on a number of occasions in the last 12 months – from oil production quotas to close ties with Beijing and Moscow and the new alignments in the Middle East.
The unpredictability of the maneuver is perhaps a precursor to how the Kingdom is positioning itself under the new ruler. The whatever-it-takes policy to further the ambition of being the regional powerhouse needs oil prices to stay elevated, for Saudi Arabia to fund massive scale development. All said, Opec’s move is also an indication that there is a growing realization that the oil market it a lot weaker than what the cartel had been portraying since the start of the year.
Chinese recovery and demand resurgence had been the engine of the rally before banking crisis took the prices down, but observers have cautioned that the growth may fade soon after the Chinese New Year. On the other side, whilst the banking industry turmoil may well be contained for now, the extent of damage done to global demand is in the unknown area as yet. A sustained level of higher oil prices also usually acts as the signal for shale oil drilling to pick pace –which could reduce the supply gap towards the end of the year.
The Washington-Riyadh growing friction is being viewed as a net bullish event by close watchers, for the oil market. China’s growing influence, particularly in light of talks between Tehran and Riyadh will also irk Washington – and further complicates the oil equation. While the highs of last year may still be distant, but the preemptive and proactive approach by the cartel clearly shows that oil under $80/bbl will continue to be tackled by Opec Plus members.