In January and February 2021, Crude Oil prices rose sharply due to significant OPEC+ production cuts, particularly the additional voluntary Saudi production cuts. Also, positive vaccine developments and a big investment in commodities by investors supported the rise in oil prices, pushing Brent crude prices higher to the highest level since 2019.
OPEC+ is scheduled to meet on Thursday, where it will discuss how much crude should be supplied to the market and whether to ease production cuts.
Currently, OPEC+ is cutting production by more than 7 million barrels a day, or 7 percent of global supply; but total OPEC production accounts for more than 30 percent of global output.
Daniel Hynes, senior commodities strategist at ANZ, said investors are “a little bit unsure whether OPEC+ will continue to reduce supply as it has in the last few months.”
He said that if oil prices rise more than expected, given that demand is still showing signs of fragility, OPEC may face an awkward situation in the short term – there seems to be no need to cut production under high oil prices, but weak demand is still the biggest uncertainty in the oil market. If OPEC is determined to stop cutting production, and the demand side unfortunately faces a second unexpected shock, then oil market turmoil will intensify.
Regarding this meeting, let’s briefly review the latest OPEC production cuts before moving into an in-depth analysis.
OPEC+ latest production cut results announced, Russia becomes a dark horse
The survey showed that OPEC crude oil production fell by 920,000 bpd in February, the biggest drop in eight months. Energy consultancy JBC noted that OPEC crude oil production fell by 518,000 barrels per day to 24.835 million barrels per day in February.
This figure is on the one hand “thanks” to Saudi Arabia, which, according to the survey, had the biggest drop in oil production among OPEC countries, and on the other hand, some countries cut production at unexpected rates: Angola, for example, where crude oil production fell to the lowest level since 2007, and Russia, for example, where crude oil production fell to the lowest level since 2007. On the other hand, some countries also cut their production at unexpected rates: Angola, for example, where crude oil production fell to its lowest level since 2007; Russia, for example, saw an unexpected drop in oil production in February, although OPEC raised Russia’s crude oil production quota.
Foreign media reported that Russia’s oil production last month was below OPEC+ quotas, the first Time Russia has not fully utilized its production quota since OPEC began its production cut program last May.
This was due in large part to the fact that many Russian oil companies halted production due to the harsh cold weather.
According to Bloomberg calculations, Bashneft PJSC, a subsidiary of Russia’s largest oil producer Rosneft PJSC, saw a significant drop in production in February, with its average daily output falling 18 percent from January levels to about 191,098 barrels of crude oil and condensate.
Another subsidiary, Slavneft, also saw its daily production drop by 2.3% to around 143,470 barrels.
Rosneft’s subsidiaries Lukoil PJSC, Surgutneftegas PJSC, Tatneft PJSC and Gazprom Neft saw an increase in daily production, but other subsidiaries, excluding Bashneft and Slavneft, saw a 1.3% decrease to 3.404 million barrels per day.
It is worth noting that it is difficult to assess the implementation of the Russian production cut agreement as Russian condensate production is not included in the OPEC+ cut agreement due to the different statistical caliber (condensate is a light oil extracted from natural gas) and the Russian Energy Ministry does not provide detailed data between crude oil and condensate. According to preliminary data from the Energy Ministry, Russia produced 38.56 million tons of crude oil and condensate in February, which translates to 10.095 million barrels per day at 7.33 barrels per ton.
The oil market supply-demand balance is broken again, this time the scales are tilted in favor of ……
On the supply side there are efforts by oil producers such as OPEC, while on the other end of the scale there is also a clear recovery on the demand side. On Tuesday, the CEO of Saudi Aramco noted that the oil market is improving, with strong demand from Asia.
The oil market has also undergone profound changes since the outbreak. I don’t know if you remember the global economic downturn last year when people were scrambling to stockpile large quantities of unneeded crude oil products. Traders who had stockpiled a lot of crude oil were looking around for storage tanks, and as fuel consumption plummeted, the price of storage tanks skyrocketed. At the time, some remote salt caverns and unused pipelines and trains in the United States were being used by traders to store crude oil, and millions of barrels of tankers were floating at sea. The economic blockade and low demand led to bursting inventories and crude oil fundamentals were so bad that oil prices plummeted for a while.
However, the market always has an automatic adjustment mechanism. In the following months, vaccines were introduced, which greatly accelerated the recovery and crude oil demand rebounded; the move of OPEC oil producers to cut production accelerated the restoration of balance between supply and demand in the oil market, and oil prices rebounded violently.
Come now, the situation may be a bit out of people’s imagination. At the time of the rapid surge in oil prices, the balance of supply and demand is once again out of balance, this time in favor of the demand side.
Foreign media reports point out that the recent rise in oil prices has led to a sharp decline in global crude oil inventories. British financial data provider IHS Markit estimates that as of the end of February, the total amount of refined oil products stored in tanks older than 10 days was 19.2 million barrels, down 77 percent from the high level of 84 million barrels in May last year.
The sharp decline in crude oil stocks relies on a rapid recovery on the demand side, which has accelerated inventory depletion; it is also related to OPEC+’s active production cuts and U.S. producers’ passive production cuts, actions that have led to a reduction in supply. In addition, a very important reason is that the spot price is higher than the spot premium for forward delivery, which makes traders reduce oil inventories and sell out quickly to cash in.
Ernie Barsamian, chief executive of Tank Tiger, a U.S. terminal storage clearing house, said.
“Oil prices started rising consistently in January, and that scared away those who were considering taking positions in crude oil futures all along.”
Krien van Beek, a broker at storage solutions firm ODIN-RVB, said.
“Many people are asking to terminate their futures contracts by April-May. So we are now in a spot premium position and nobody wants to renew their contracts when they expire.”
Even the OPEC+ expert group pointed out the problem of sharply declining stocks. The group expects the base case scenario to see crude stocks below the five-year average by August this year. Even if production resumes at 2.4 million barrels per day by June, oil stocks will fall OPEC’s latest supply and demand outlook report, released at a technical conference, shows oil stocks will fall by about 400 million barrels in 2021.
How will OPEC+ choose?
The tightening fundamentals and the recovery in oil prices have seen a large number of people bullish in recent weeks. They predict that oil prices will continue to rise as producers’ supply cannot keep up with crude consumption and maintenance of North Sea fields will further reduce crude supply. There are also signs that demand is starting to pick up, with U.S. gasoline demand surging by 1 million barrels last week to 8.76 million barrels per day, equivalent to levels seen before the March 2020 outbreak, according to Descartes Labs.
Michael Lynch, president of Strategic Energy &Economic Research, said.
“People are becoming very optimistic about OPEC+’s ability to restore balance to the market. The market is seeing demand continue to improve and OPEC+ will not see oversupply again when demand rises.”
As a result, some analysts believe that OPEC can feel comfortable announcing an increase in production this week. Those optimistic about a production increase include Louise Dickson, an analyst at consulting firm Rystad Energy AS, who said.
“The environment of rising oil prices, an increasingly optimistic summer demand outlook and the fact that U.S. oil production is growing this year should give OPEC+ the confidence to increase supply modestly.”
Some see opportunity, but some see risk.
Today more and more people are finding that crude oil prices have fallen as the dollar’s downward trend eases and the market speculates that OPEC+ will not be too aggressive in announcing a halt to production cuts at this week’s meeting. After all, it was only previously that the Saudi energy minister called on members to remain “extremely cautious”.
Analysts say that the market continues to face risks in the near term, mainly the vulnerability of demand.
For example, the big buyer of crude oil – India, the country’s gasoline prices hit a record high, India’s diesel demand also fell compared to the same period last year. In addition, demand for U.S. crude in Asia, particularly China, has fallen sharply. According to foreign media reports, crude oil exports from U.S. offshore oil ports in Louisiana fell to zero as Asian buyers sought to reduce high inventories that exceeded The load of storage facilities. The New crown outbreak has devastated U.S. crude demand since early last year and shut down oil wells across the country.
Analyst Yuntao Liu said.
“Demand for U.S. oil will likely not recover until later in March. Oil supplied during this period will arrive in China during May and June, when most of the production has been completed.”
All of these signs point to resistance to some of the recent upward momentum in the oil market.
Stewart Glickman, energy stock analyst at CFRA Research, said.
“Now that oil is back at $60 a barrel, that could force OPEC to stop cutting supply, the question is what level they want to bring it back to. The biggest risk is that supply assumes that we can get demand back to pre-Epidemic levels in 2021, but that’s not the case.”
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