OPEC officials are fond of saying they are "optimistic,” when asked their view of the oil market, but even the sunniest of ministers likely did not expect a 30% rally in Dated Brent since the start of the year.
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With coronavirus vaccinations progressing expeditiously in many developed nations and global oil inventories trending downwards, several OPEC members and their allies will be keen to relax production quotas and take advantage of the bull run, when they meet March 4 to decide on output levels for April and perhaps beyond.
The question is whether the OPEC+ alliance's warier countries – particularly Saudi Arabia – are in as much of a mood to celebrate by opening the taps.
The coalition is cutting 7.2 million b/d of crude production – roughly 7% of pre-pandemic supply – and under the rules, the curbs can be eased by up to 500,000 b/d monthly. Saudi Arabia must also decide whether to keep its voluntary additional 1 million b/d cut that is scheduled to end after March.
Many analysts, including OPEC's own, have concluded the market can likely absorb a 1.5 million b/d production increase without tipping into surplus, but releasing all that crude at once risks spooking traders and unraveling the price rally. Maintaining the cuts, however, could overheat the market and erode still fragile oil demand.
Potentially on opposing sides once again are Russia, which has consistently pushed to pump more, and Saudi Arabia, whose energy minister Prince Abdulaziz bin Salman has urged the alliance to go slow.
With Dated Brent at a 13-month high, Prince Abdulaziz may struggle to convince other ministers of the need for continued tight discipline. But OPEC+ watchers say Saudi Arabia may use its extra cut as a bargaining chip, whether holding on to it to keep propping up prices or perhaps threatening to unleash it all if other members' quota compliance deteriorates.
"The strong price signal makes higher quotas from OPEC+ likely next week, but tricky compromises between bullish Russia and cautious Saudi Arabia still have to be found,” Graham Walker, an analyst with consultancy Petrologica.
Crunching the data
To be sure, oil producers have much reason to remain vigilant.
Refineries will enter spring maintenance season in the coming weeks, likely depressing crude demand. And despite the significant drawdown in inventories from levels bloated during the worst of the pandemic, oil stocks remain above pre-COVID-19 volumes.
Demand in key Asian growth markets still looks unsteady, and India's oil minister, Dharmendra Pradhan, has called on OPEC+ to slacken its quotas to ease the burden on price-sensitive consuming countries, such as his own.
On the supply side, potential talks between the US and Iran could lead to sanctions relief that unlocks 1 million b/d or more of Iranian crude exports. Iran's oil minister, Bijan Zanganeh, has been invited to an OPEC+ monitoring committee meeting March 3 to provide an update, sources said.
"Market fundamentals are not yet sufficiently solid to balance and stabilize the oil market on a lasting basis,” one OPEC+ delegate told S&P Global Platts. "Bullish sentiment in the market should not be overvalued because the higher you go, the harder the fall.”
But OPEC+ ministers also have a slew of economic data to cheer.
Fiscal stimulus measures and the coronavirus vaccine rollout have improved the economic outlook for many countries, and global GDP growth now looks more robust.
Many commodities have been on a major price upswing, leading some commenters to call the beginning of a supercycle. The tightening oil market, in particular, has been in a strong backwardation, helping induce draws from storage.
Platts Analytics forecasts that world GDP will rise 5.1% this year, up from its previous projection of 4.9%, with oil prices set to strengthen into the summer.
The recent Texas deep freeze may also provide a temporary lift to OPEC+, with shut-in US production resulting in further inventory depletions.
"Should be a good mood among ministers,” another OPEC+ delegate told Platts. "The market has become constructive, structure is in backwardation, so stocks may adjust further. Personally, I see a consensus will be reached quickly.”
Battle-scarred and wary
The meeting comes almost exactly a year since the last time ministers were able to gather in person in Vienna – which ended up being a showdown between Russia and Saudi Arabia that almost destroyed the alliance.
Dismissing the need for deeper cuts to combat the then-nascent pandemic, Russia walked away from the OPEC+ pact, prompting Saudi Arabia to flood the market with crude in a show of muscle.
Russia would eventually return to the table, as the market crashed in April, and the coalition ultimately agreed to historic production cuts that are now being unwound.
But tensions have persisted, with the UAE and Kazakhstan joining Russia in recent meetings to push for a faster easing of quotas.
As recently as Feb. 17, Prince Abdulaziz warned his OPEC+ counterparts that "the scars from the events of last year should teach us caution.”
The meeting will be a test of how receptive the alliance remains to the prince's admonishments and just how optimistic it is about the market's recovery.