A group of some of the world’s most powerful oil producers will hold a crucial meeting on Thursday to discuss reversing some of the output cuts it made last year.
OPEC and its non-OPEC partners, an energy alliance sometimes referred to as OPEC+, will convene via video conference in a bid to reach consensus over how to manage supply to the market.
The group last year agreed to restrict the amount of oil it produces in an effort to prop up oil prices as strict public health measures coincided with an unprecedented fuel demand shock.
This week’s supply decision comes at a time when oil prices have rebounded to pre-virus levels, production in the U.S. has taken a hit from freezing storms and the coronavirus pandemic continues to cloud the outlook.
OPEC’s de facto leader Saudi Arabia has publicly encouraged allied partners to remain “extremely cautious” on production policy, warning the group against complacency as it seeks to navigate the ongoing Covid-19 crisis.
Non-OPEC leader Russia, meanwhile, has indicated it wants to push ahead with a supply increase.
Analysts broadly expect OPEC+ to hike output from current levels, but questions remain over how much exactly and which countries will be affected.
At an industry event last month, Saudi Arabia’s Energy Minister Prince Abdulaziz bin Salman reportedly said to those trying to foresee the energy alliance’s next move: “Don’t try to predict the unpredictable.”
Both Saudi and Russia ‘will get what they want’
Tamas Varga, analyst at PVM Oil Associates, told CNBC via telephone that he believed OPEC and non-OPEC partners had done an “amazing job” in rebalancing the market.
However, while the global oil demand is recovering, he warned that the recovery is still “very, very fragile.”
“What really matters here is Russia and Saudi Arabia. The breakeven price for Russia’s budget is much lower than that of Saudi Arabia, so you will see a kind of gap in the views between these two countries,” Varga said.
OPEC+ initially agreed to cut oil production by a record of 9.7 million barrels per day last year, before easing cuts to 7.7 million and eventually 7.2 million from January. OPEC kingpin Saudi Arabia has since taken on voluntary cuts of 1 million from the beginning of February through March.
Alexander Novak, Russia’s deputy prime minister, appeared to signal Moscow’s intent for a supply increase last month, claiming the market has already balanced.
“Russia wants to move back towards normal production as quickly as possible while Saudi Arabia wants to enjoy high prices a little while longer and rather keep the market on the tight side than the loose side. We think both will get what they want,” Bjarne Schieldrop, chief commodity analyst at SEB, said in a research note.
Russia will likely be allowed to increase output further, he added, while Saudi Arabia will return “some or potentially all” of its 1 million barrels per day unilateral cut.
Analysts expect OPEC+ to discuss allowing as much as 1.3 million barrels per day back into the market on Thursday.
“Statements from Saudi Arabia indicates that they are on the cautious side. Rather to keep it a little tight a little too long than to run into an oversupply before Covid-19 vaccines have truly made their magic on global economic activity and oil demand,” Schieldrop said.
“The upcoming OPEC+ meeting is thus unlikely to ruin the oil party with respect to April supply as the total outcome is likely going to leave the market slightly short rather than in surplus.”
OPEC+ not yet ready to switch course
Oil prices, having climbed to a 13-month peak last month, appeared to extend losses that began last week on expectations that OPEC+ may be set to increase global supply.
“Our expectation is that they are going to rise in line with their previous policy deal which was announced in December of 2020. And that is to not increase production more than 500,000 barrels per day. We expect that policy to still be valid,” Louise Dickson, analyst at Rystad Energy, told CNBC via telephone.
She added that OPEC could, in theory, increase production by 1.3 million barrels per day, but “we don’t think they are going to overshoot this time around.”
“Russia will build up momentum in their market view, but we don’t see a complete switchover. For the last year, OPEC+ has been really firmly under the reins of Saudi Arabia, guiding the policy, making the calls, calling the shots, etc. And I don’t think that, after a year of such market and supply diligence, the group is ready to switch course just on a whim of $65 Brent or an increasingly tighter oil market,” she said.