Saudi Arabia and its OPEC+ (Organization of the Petroleum Exporting Countries) allies has shocked the oil market with a decision to keep supply in check.
The move caused a spike in oil prices and added another pressure to the global economy as it emerges from the pandemic. One year since outbreak a bitter price war that sent crude below zero, the kingdom showed that its priority is preserving the hard-won oil recovery rather than worrying about tightening the market too much.
“I don’t think it will overheat,” Saudi Energy Minister Prince Abdulaziz bin Salman said. Last year “we suffered alone, we as OPEC+” and now “it’s about being vigilant and being careful,” he said.
OPEC+ and its allies had been debating whether to restore as much as 1.5 million barrels a day of output in April. Experts from across the globe were in agreement that global markets could use an increased output to balance a rapid run-up in prices.
But after being urged to “keep our powder dry” by Prince Abdulaziz, OPEC+ members agreed to hold steady at current levels, with the exception of modest increases granted to Russia and Kazakhstan. Saudi minister went one step further, saying the additional 1 million barrel-a-day voluntary production cut the kingdom introduced last month was now flexible.
This means that the group will still be withholding about 7 million barrels a day from the market, equivalent to about 7 percent of global demand, even as fuel consumption recovers in many countries.
Risk of inflation
Brent, the most widely-used crude commodity benchmark, has already increased about 30 percent this year to almost $68 a barrel. Throughout the first quarter, OPEC+ has kept production below demand to utilize the excess from the COVID-19 lockdowns. Without additional supply, that deficit will widen significantly in April, according to the cartel’s internal estimates.
“We expect oil prices to rise toward $70 to $75 a barrel during April,” said analysts. “The risk is these higher prices will dampen the tentative global recovery. But the Saudi energy minister is adamant OPEC+ must watch for concrete signs of a demand rise before he moves on production.”
Relations with the US
With the bond market already on edge for signs of inflation, the aggressive move from OPEC+ could become a headache for the US Federal Reserve and the European Central Bank. And it’s not just oil that’s surging. From copper and steel to corn and soybeans, the prices of many commodities are rapidly rising.
The decision comes at a tense moment for the Saudi-American alliance, as President Joe Biden seeks to reset the relationship with Riyadh, and particularly with Crown Prince Mohammed bin Salman.
Russia and Kazakhstan secured exemptions from the deal, allowing them to boost output by 130,000 and 20,000 barrels a day in April, respectively, “due to continued seasonal consumption patterns,” according to a statement posted on OPEC’s website. The two nations were granted similar allowances for February and March.
OPEC+ will meet again on April 1 to discuss production levels for May, according to the statement.