FOCUS: OPEC, allies skate on thin ice as oil mkt awaits call on output

FOCUS: OPEC, allies skate on thin ice as oil mkt awaits call on output

Informist, Wednesday, Mar 3, 2021

By Sayantan Sarkar and Roshni Devi

MUMBAI – "When you see a good move, look for a better one," said Emanuel Lasker, the German chess player whose reign as world chess champion was the longest in history.


Akin to a game of chess, in which every move has ramifications of its own, the Organization of the Petroleum Exporting Countries and its allies are due to make their next move this week. This comes at a time when the balance in the crude oil market couldn't have been more delicate, with OPEC's next move either supporting a recovery in prices or cascading into a negative impact on oil prices and the global economy.


At a ministerial meeting with its members and allies on Thursday, the cartel is likely to be cautious and calculative in bringing back supply this time with oil prices near multi-month highs. If OPEC raises production too much, global prices could fall to $50 per bbl. On the other hand, if it is overcautious, a surge in prices may pave the way for US shale to gobble up its market share once again.


Experts say OPEC and its partners may increase supply by another 500,000 barrels per day from April as global prices are now back to pre-pandemic levels. Likewise, Saudi Arabia may also end its voluntary cut of 1 mln bpd or increase supply in tranches from next month.


"As long as that's the decision, I think the market will take it in its stride and crude may sustain an uptrend, depending on expectations and stimuli for an economic rebound," said Vandana Hari, founder and chief executive officer of Vanda Insights, a Singapore-based energy consultancy.


OPEC and its partners had initially agreed to reduce supply by a record 9.7 mln bpd last year, when the pandemic was at its peak. It had then eased curbs to 7.7 mln bpd as global demand started recovering, with governments easing travel restrictions.


Saudi Arabia's decision to voluntarily cut its own production by 1 mln bpd in February and March gave a further boost to global oil prices. OPEC's discipline in restraining production and optimism over a massive COVID-19 relief package in the US propelled crude prices to near 14-month highs in February. 

However, Commerzbank AG's Carsten Fritsch says Russia would want to significantly increase production as its government fears a surge in US shale oil production would usurp the market share of OPEC and its allies. 

Russia, which has a long history of not fully complying with output targets, may even push for higher supply in the coming months.

"Saudi is becoming stricter with members because it is compromising a lot," said Shweta Shah, senior research analyst at Motilal Oswal Financial Services. "Their pricing for Asian customers is also slightly up because they know they would rather cut production today and enjoy the high prices."


In terms of global demand, major energy organisations such as the International Energy Agency and OPEC itself had earlier stated that the rebound in demand this year would not gather steam until the second half, as vaccination drives against COVID-19 are likely to take longer than anticipated.


According to Mike Wittner, head of oil markets research at Intercontinental Exchange, jet fuel, which accounts for 10% of world crude oil demand, is unlikely to recover to pre-pandemic levels in the foreseeable future as air travel remains constricted. What is more, several parts of Europe have been witnessing a resurgence in virus cases, which has prompted governments to reintroduce restrictions.


In India, major cities are witnessing a surge in COVID-19 cases as well, and murmur of reintroduction of lockdowns loom dangerously over fuel demand. The country is the third-largest importer of crude oil in the world.


Against the current backdrop of fragile global crude oil demand, Commerzbank AG's Fritsch said in a note, "The current price level is too high in our view, and without a decline, a significant increase in US oil production would be expected, which would put pressure on prices."


Currently, the price of West Texas Intermediate crude oil on New York Mercantile Exchange is around $60 per bbl, and that of Brent on Intercontinental Exchange around $63.


So far, the alliance between OPEC and its partners has been largely successful in avoiding a situation like last year when prices plunged to negative territory for the first time in history. Production cuts and timely decisions since April have kept the market afloat, and crude prices are enjoying a lengthy stay at the top.


"The situation right now is that the market is somewhat balanced and Saudi or OPEC would not want to ruin it now," said Shah. 

OPEC has been meticulously planning every move by unfailingly holding meetings every month, a far cry from the two meetings a year it would hold before the pandemic struck. It has also had the unenvious task of keeping a sharp eye on its rivals, and an even sharper eye on its allies.


Come Thursday, the market will focus on the OPEC's opening gambit and whether the cartel will push its members and allies to sacrifice higher prices for now, so that the King of stable prices in the long run remains unscathed.  End


US$1 = 72.72 rupees

Edited by Ramya J.S. D'Rozario


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