OPEC and its allies have a tough decision to make when they meet on Thursday: stay cautious and keep supplies tight, or view the current rise in crude prices as a sign that demand is back and healthy enough to loosen. the faucets.
“You almost have to be an epidemiologist to understand markets these days,” Samantha Gross, director of the Energy Security and Climate Initiative at the Brookings Institution, told Al Jazeera.
While the tight supply and vaccine optimism have both helped bring crude prices down to pre-COVID levels in recent weeks, the coronavirus variants continue to threaten the global economic recovery and prevent some suppliers from flood the market with more than it can handle.
The Organization of the Petroleum Exporting Countries (OPEC) and its Russian-led allies, an alliance dubbed OPEC +, could discuss the possibility of returning up to 1.5 million barrels per day (bpd) to the global market . Under the current agreement, OPEC + is expected to increase production by 500,000 bpd. Currently, seven million barrels are still offline.
On Tuesday, the global benchmark Brent hit $ 63.71 a barrel while the US West Texas Intermediate (WTI) hit $ 60.71.
It’s a far cry from last spring when the coronavirus pandemic hit demand for oil, for the first time sending crude futures prices into negative territory and forcing OPEC + to curb production.
Since then, closed factories, especially in China and India, have reopened and ground flights have taken off. Locks and restrictions have been lifted (but not for long in some places).
An unprecedented glut of supply pushed prices down last year. But thanks to OPEC + production cuts and the recovery in demand, the market has stabilized. Supply has tightened considerably. And mass vaccination campaigns have heightened optimism about a global economic recovery.
But some analysts are still a little skeptical about the persistence of the recent surge in crude prices.
“Is demand coming back for sure?” Are the locks lifted for good? With all these new [coronavirus] variants, who knows how long we’ll stay there? Gross said.
The million barrels question
Oil production fell further last month after the Saudi mega-producer decided to voluntarily withhold even more of its production than the OPEC + deal required for February and March.
OPEC’s February production fell the most in eight months after Riyadh cut production by nearly a million barrels a day or 11 percent, according to a Bloomberg survey.
“The Saudi cuts came at the right time with vaccine optimism, which is why we are witnessing this mini oil rally right now,” Louise Dickson, analyst at Rystad Energy, told Al Jazeera.
But the market, still wary of last year’s negative prices, is eagerly awaiting OPEC + ‘s action plan to bring back the million barrels from Saudi Arabia.
“We arrived here after ten months of very diligent cuts by Saudi Arabia. OPEC + is highly unlikely to change course on a campaign that raised oil to $ 65 a barrel, ”Dickson said.
But two of the world’s biggest producers might disagree on what to do on Thursday.
Russia’s deputy prime minister said on Russian television last month that the oil market was rebalanced, signaling a willingness to restart production. But Saudi Arabia remains cautious.
Riyadh and Moscow have diverged in the past. State budgets help explain why.
The International Monetary Fund estimates that Saudi Arabia needs oil to reach $ 67.90 to balance its books this year. The balanced price of oil in Russia is much lower.
Some analysts say the market can afford more barrels at the moment.
“Things are so tight right now that even if OPEC + made 1.3 million barrels a day, it wouldn’t reject the market,” Dickson said.
While the pandemic has been the biggest disruptor of the past year, the weather in 2021 has not been accommodating either. Russia, having been given the green light to increase production, failed to pump enough due to the freezing weather.
Winter storms also caused the temporary shutdown of refineries in the United States.
“The deep freeze in Texas took oil off the market, and this loss of production has supported Brent prices at least in the short term,” Gross told Al Jazeera.
Focused on balance sheets rather than double-digit growth, the US shale is not as much of a threat to Brent as it once was, Gross added.
“Obviously, they all want to bring production back, but the bigger question is how much coronavirus is behind us and it’s hard to say.” Gross said. “We’re not out of it yet.”