The upcoming OPEC+ meeting, slated for Thursday, will test the group’s ability to overcome chronic supply and demand imbalances that have plagued the global oil sector since the emergence of the COVID-19 pandemic approximately one year ago.
After price slumps for months due to pandemic-driven demand destruction, oil has finally rebounded to pre-pandemic levels and become an attractive commodity again with the help of a better but still uncertain oil demand recovery.
However, the elephant in the room is now 'supply' and members of the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC countries including Russia, dubbed as OPEC+, are expected to either continue with previous high-level output cuts or raise cuts further in line with rising oil prices during the 14th ministerial meeting of OPEC+ on March 4.
In early January, Saudi Arabia announced a two-month unilateral cut to its crude oil production for February and March in addition to its OPEC+ commitments. The group cut 8.125 million barrels per day (bpd) for February and reduced it to 8.05 million bpd in March.
Soon after this decision, oil prices showed significant gains in February with both benchmarks increasing by more than 15%, as the move was a timely response to oversupply concerns.
Analysts are unsure whether the group will decide during the meeting on Thursday to extend the production quota into April, as producers may want to benefit from high oil prices.
'This is another test to see the strength of OPEC+ and their real long-term outlook for the alliance as well as their ability to keep the markets well supplied,' Jose Chalhoub, a political risk and oil analyst, told Anadolu Agency.
He said the meeting would also show the coherence between Saudi Arabia and Russia on keeping the balance between supply and demand without falling into a price war arising from the divergent goals of both countries.
'That's another issue to watch and how Saudis are able to keep the alliance still glued together after a tough 2020,' he said.
The meeting comes amid rising tensions between Washington, Riyadh and Tehran, as well as tension in the Persian Gulf with the recent drone attacks of Yemeni rebels Houthis on Saudi soil and an attack against an Israeli ship by Iran, Chalhoub said and added:
'These tensions may add upward pressure to oil prices and offset the sustained efforts by OPEC+ in trying to bring back some stability to oil markets and prices.'
- Caught between supply and demand
Neil Atkinson, an independent oil analyst, expects to see a micro-management approach from the OPEC+ countries through 2021.
'Although oil prices are currently in a sweet spot for the producers, this cautious approach is necessary as they should not place too much oil in the market while there remains considerable uncertainty about how strongly oil demand will recover from the Covid-19 pandemic,' Atkinson, who was the head of the oil division at the International Energy Agency (IEA) until January 2021, told Anadolu Agency, citing Saudi Energy Minister Prince Abdulaziz bin Salman's remarks on Feb. 17.
Speaking at an online conference held by the International Energy Forum in Riyadh, Salman had warned member countries against complacency and said, 'The uncertainty is very high and we have to be extremely cautious. The scars from the events last year should teach us caution.'
On the other hand, Alexander Novak, the deputy prime minister of the group’s maverick member Russia, said that markets are in balance in terms of supply and demand, which signals that the country's attitude at the next OPEC+ meeting might be to put more barrels on the market.
As rising prices make shale oil production attractive, the perception that this situation may push US shale oil producers to fill the gap created by the OPEC+ cuts in the oil market has already started making headlines.
However, Atkinson said although US crude oil production reached an all-time high of 13 million bpd in November 2019, shale producers found it hard to make profits.
'Investors are said to be reluctant to fund more drilling and production as they wish to see returns on their earlier investments. This so-called ‘capital discipline’ will likely act as a restraint to the growth of US oil production,' he said.
- Extra barrels from Iran still on the table
Atkinson warned against a possible supply challenge that OPEC+ countries could face if the US decides to remove oil sanctions on Iran.
'Of course, we do not know if this will happen. But, it is thought that if the US does change its policy, then up to 2 million bpd of supply could be available to the market at relatively short notice,' he said, adding the extent of the challenge will depend on the strength of the recovery in global oil demand.
By Firdevs Yuksel and Sibel Morrow