Oil: Saudi minister hopes to satisfy producers and consumers at these prices

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When Saudi Oil Minister Abdulaziz bin Salman holds a Zoom call next week for the sixth time this year with his peers from 22 countries, he is unlikely to be thinking of new plans to push the market up, but rather how to do it. ‘stop the band before him pumping more than they should at these prices.

It can of course be said that this is a daily job for AbS, as the Minister is also sometimes referred to by his initials.

Since coming to power just under two years ago, every meeting chaired by ABS of the 13 members of OPEC, or Organization of the Petroleum Exporting Countries, and its 10 Russian-led allies – which unite as OPEC + – starts with calls for significantly higher production quotas. He deftly shoots each one down, reminding the group’s exit hawks that there is something more important: the price of oil itself. And, of course, demand and market share.

Thanks to the efforts of AbS, OPEC + compliance with Saudi Arabia-led production cuts has reached an astounding 122% since the destruction of COVID demand that took U.S. crude to minus $ 40 a barrel in April 2020.

I say unbelievable, because anyone who has followed OPEC for much of their 60s will know their legacy of cheating, when it comes to production quotas. And while the Russians only started working in earnest with the cartel five years ago, they have become the new villain in the play (as far as the Saudis are concerned) for overproduction within the larger OPEC +. . Russian Oil Minister and Deputy Prime Minister Alexander Novak usually pushes AbS to the wall on quotas at every OPEC + meeting, before walking away with a deal that seems to work more to Moscow’s advantage than Riyadh’s.

In fact, the 2020 oil market collapse was precipitated by the very public and ugly breakdown of exit talks between the Saudis and the Russians, just before the start of the pandemic. The lion’s share of OPEC + cuts since have been taken on by Riyadh, although AbS deserves credit for assigning production limits to the other 22 coalition members and ensuring they do so. hold.

Neither the producers nor the consumers too happy now

But with each passing month of recovery in the oil market, the Saudi minister’s challenge to get the Russians – as well as inherited OPEC cheaters such as Nigeria – to respect the quotas he sets has only made way. increase. And the reason, ironically, is the same oil price that AbS once pointed out as the reason the deep cuts are expected to continue. That price is now more than triple what it was on April 13, 2020, when OPEC + first announced it would withhold some 9.7 million barrels per day from the market.

With an average of $ 26 a barrel at the time – and a world practically bathed in oil, with no takers – it was easy to see why the OPEC + countries endorsed production cuts so strongly.

Now, at $ 73 a barrel for U.S. crude and $ 75 for US crude, it’s also easy to see why these same countries are eager to produce more, in order to add desperately needed income to their starving coffers by a year of pandemic distress.

More than anyone else, AbS understands this. Saudi funds would also benefit from increased production at these prices. But the minister is also aware of the risk of opening OPEC + ‘s taps more than necessary now, especially in a world where COVID-19 vaccinations are severely out of balance and another variant of the virus, Delta, has started to do so. rage.

Saudi minister still not convinced of oil demand

This explains AbS’s mantra every time it has been asked about oil demand over the past few months:

“I’ll believe it when I see it.”

Yes, despite the return of global stocks to seasonal trends over five years; despite the fact that the market is draining virtually all of the oversupply of the COVID-triggered glut; despite US drillers pumping 2 million barrels less per day now than before the pandemic; and despite a barrel traded three times higher today than 14 months ago, the Saudi minister is still not convinced of the demand for oil.

But AbS also knows the danger of letting the price of oil continue to rise as it has since November, when breakthroughs for the first COVID vaccines were announced.

At some point, soaring oil prices will hurt the global economy, if they haven’t already, judging by lingering complaints from India, the third-largest importer of crude, and the highest gasoline pump prices in the United States in 7 years.

Apparently taking these into account, AbS said on Thursday:

“We have a role to play in controlling and containing inflation, ensuring that this market does not degenerate. ”

A double problem and a high voltage balancing act

Therefore, AbS has a double problem: it needs to ramp up production just enough to appease OPEC +, which wants to release additional barrels this summer, and it needs to cool the rally in hot crude; yet he must ensure that the increase he authorizes does not weigh too heavily on the psyche of oil traders.

For the record, OPEC + said it was considering a 500,000 barrels per day hike in August production, after agreeing to a 440,000 bpd increase in July.

But nothing is certain until the group on July 1. It would not be surprising to hear Russia and a few others claiming as much 700,000 to 800,000 bpd more for August, given that OPEC + is still withholding 5.8 million barrels a day from the market.

The Paris-based International Energy Agency, which looks after the interests of western oil-importing countries, has urged OPEC + to start tapping its slack production capacity to boost supply as demand rebounds. Wall Street trading giant Goldman Sachs estimates the oil market is in deficit of 3 million barrels per day and has predicted a Brent price of $ 80 by July, a prophecy that seems likely to come true. Not to be outdone, Bank of America has forecast $ 100 per barrel.

All of these combine to make AbS’s production maneuvers a balancing act that becomes more and more dangerous with every OPEC + meeting, says Tariq Zahir, who heads oil fund Tyche Capital Advisors in New York.

The fund manager adds:

“People talk about $ 100 worth of oil, thinking that’s what the Saudis want. They couldn’t be more wrong. AbS doesn’t want $ 100 worth of oil. He is probably very happy with the current price. What worries him is keeping OPEC + together at these prices, instead of letting everyone produce madly like before.

“Also, once summer oil consumption ends, there will be a seasonal slowdown that will affect all travel, including flights. There is also a chance that the Delta variant of the virus will spoil the global recovery in the coming months, and the likelihood that Iran will secure a nuclear deal in the fourth quarter. None of these are favorable to the demand for oil.

Warning: Barani Krishnan uses a range of perspectives outside of his own to bring diversity to his analysis of any market. For neutrality, it sometimes presents contrarian views and market variables. He does not hold a position in the commodities and securities he writes about.

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