It was a big week in the global oil markets. OPEC+ ministers met via Zoom on Monday/Tuesday to determine the trajectory of OPEC production for February. Expectations were that the group would maintain the status quo, meaning a 500,000-bpd increase in February, or a repeat of the January increase. We would note WTI was already flirting with $50.00 with these expectations.
Tuesday’s announcement was far more material in scope and very constructive for prices. OPEC+ ministers agreed on Tuesday to allow both Russia and Kazakhstan to increase production next month by only 75,000 bpd each. This combined 150,000 bpd is a much slower than expected pace of growth.
It was the surprise 1 million bpd unilateral production cut however, announced by the Saudi energy minister on Tuesday, that yielded the multi dollar rally and pushed WTI north of $50.00. Specifically, Prince Abdulaziz bin-Salman, announced the Kingdom would voluntarily cut production by 1 million bpd in both February and March to 8.125 million bpd.
Prince Abdulaziz called the cuts ‘a preemptive measure’ and a ‘homegrown’ idea but confirmed that Saudi Arabia and Russia are ‘on the same page’. Indeed, Russian Deputy PM and energy minister Alexander Novak urged caution on supply increases. Novak said the oil market is ‘still fragile’ at present despite his longer-term optimism that vaccines will bring an end to the COVID shutdowns/demand destruction.
At face value, the Saudi cut yields a net production decline next month of 850,000 bpd versus the initially expected 500,000 bpd increase. The Saudis followed up on Wednesday by announcing price hikes for February contracts to customers in the US and Asia, where physical sour crude markets are already tight.
The biggest question going forward is whether current levels of OPEC+ quota discipline and Saudi/Russian unity/leadership can be maintained. We would caution on betting against the Saudis. They are highly motivated to get Brent back above $60.00 to balance the government budget, slow the burn rate of foreign currency reserves as well as optimize price/curve for coming tranches of Aramco IPO.
We think it is also important to consider who is now “in charge” of the oil portfolio in both Saudi Arabia and Russia when considering the likelihood of OPEC+ strategy success. The widely feared Saudi Crown Price, MBS, has taken a hands-on approach to oil policy in the kingdom. He has also been quite public, vocal, and brash in challenging market “shorts”. Saudi Arabia also demonstrated its ability late last year to pressure even its closest allies, like the UAE, to make up for previous quota cheating.
It is also important to note that Prince Abdulaziz is a close relative of MBS and the first Saudi royal to hold the position of energy minister. Know too, Abdulaziz has worked alongside, and shadowed Saudi oil ministers, for more than three decades. Like MBS, Abdulaziz is a heavyweight. It is not a coincidence that MBS’ consolidation of power includes the Saudi oil industry and ministry. More so than ever before the Saudi team is motivated and has the clout to make $60.00 happen.
We also point out that Russia, OPEC+’s other lynchpin, has also consolidated power around its energy ministry with the recent promotion of energy minister Novak to Deputy Prime Minister by President Putin. Russia too wants, and needs, $60.00 and we would suggest the unity and clout of Saudi Arabia and Russia to achieve goals has never been higher.