OPEC and a Russian-led coalition of oil producers maintained most of their production cuts, surprising traders and driving oil prices up dramatically.
Traders expected the group to distribute more oil to the world after prices rose steadily from last year’s pandemic lows. Brent, the benchmark index for international crude, was trading more than 5% higher in the early afternoon at $ 67.55 a barrel, its highest level since January 2020. West Texas futures Intermediate, the US benchmark, rose 5% to $ 64.60 a barrel, its highest intraday level since April 2019.
The deal, reached on Thursday after an online meeting between the Saudi Arabia-led Organization of the Petroleum Exporting Countries and a group of non-OPEC producers led by Russia, is the latest cohort change in a debate at times. giddy about how the ebb and flow of the coronavirus pandemic is affecting the global economy and, by extension, oil demand.
Hours earlier, Saudi Arabia and Russia were considering a different proposal to boost production, according to people familiar with the matter. Saudi Arabia has been separately planning to ease in the coming months a unilateral production cut announced in January, The Wall Street Journal reported last month. The kingdom said on Thursday that it will maintain those cuts, at least until April.
For the better part of a year, OPEC delegates have tried with little success to measure the effect of the pandemic on demand. In a series of meetings late last year and early this year, they have zigzagged between optimistic forecasts that they say deserved more production and dire warnings about continued lockdowns that require a halt to production.
Under the agreement reached Thursday, most members of what is known as the OPEC-plus alliance agreed to keep their production unchanged, with minor exceptions for Russia and Kazakhstan, which amount to about 150,000 barrels a day combined. That brings the overall cuts agreed by the group to 6.9 million barrels per day, down from the more than nine million barrels per day at the beginning of the crisis.
The move is a victory for Saudi Arabia’s Energy Minister Abdulaziz bin Salman, who has always urged caution about the pace of the global recovery from the pandemic, while regularly accommodating Russia’s enthusiasm for turning the taps further. at any sign of recovery.
“We are not fast, we are not angry, we are cautious,” he said after Thursday’s meeting.
Russia, by contrast, has continually expressed more optimistic views and pushed for increased production. “If we look at the situation, it is much better than a year ago, [or] than in the fall, ”Russian Energy Minister Alexander Novak said Wednesday, according to delegates in attendance.
In an illustration of the rapidly changing assessment within the group, Riyadh and Moscow had discussed a separate scenario early Thursday that would bring in a million barrels of oil a day, according to officials familiar with the discussions. Saudi Arabia would have contributed half of that fresh production, while the other OPEC countries would pump the rest under the proposal. However, in the end, Prince Abdulaziz convinced his counterparts to stand firm, in part by giving Moscow a small waiver from the restrictions, delegates said.
Prince Abdulaziz told delegates that Saudi Arabia agreed not to roll back its own cuts, a move that could have softened oil prices, as a reward for OPEC-plus members who he said did not cheat or produce in excess amid previous deals, delegates said. Such deception has undermined previous agreements.
Another dynamic: Saudi officials believe the kingdom is in a better position to defend itself against US shale oil producers, which were hit by the pandemic price drop. These producers have traditionally been able to increase production rapidly once prices recover, threatening global market share.
Christyan Malek, head of oil and gas research at JP Morgan Chase & Co., said the Saudi decision indicates Riyadh’s confidence that US shale companies for now cannot take advantage of the price spike, especially after being struck by a winter storm. which removed about 2.5 million barrels per day from production in Texas and one million barrels per day in other oil-rich states. Malek said OPEC’s restraint is further pushing prices to a point where the Saudis are back in control.
In recent months, similar OPEC-plus meetings have been contentious and negotiations have been fluid during days of talks. Saudi Arabia surprised markets – and other delegates – at the end of an OPEC-plus meeting in January with the decision to cut its production by one million barrels a day until the end of March.
The OPEC plus cuts have helped bring international oil prices back above $ 60 a barrel for the first time in a year. Demand has also recovered, especially in Asia and particularly in China, which has recovered more quickly than other regions from the economic fallout of the pandemic.
OPEC expects world oil consumption to increase by 4.72 million barrels per day in the fourth quarter of 2021, compared to the first three months of the year. The International Energy Agency said last month that a recovery in demand would outstrip production in the second half of the year, causing a “rapid drop in inventories” and wiping out excess crude that has accumulated since the pandemic began. .
The economic consequences of the pandemic have altered thinking within the OPEC-plus group. Around the time Covid-19 first emerged in China, Saudi Arabia and Russia were engaged in an effective price war, each turning on their taps to gain market share.
As the economic damage from the virus became clearer, as much of the world began closing factories and businesses and reducing global travel, Riyadh and Moscow reconciled. They led their respective producer groups in record cuts, equivalent to more than nine million barrels per day, or nearly 10% of global daily demand in 2019. They promised to restore those cuts in installments of two million barrels per day from the last. summer.
As lockdowns eased, they unleashed the first wave of restarted production, but then declined as cases began to surge again across much of Europe and the US in late summer and fall.
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