Oil prices climbed more than 4% on January 5 after OPEC+ reached an unusual production quotas agreement, with Saudi Arabia committing to cut the kingdom’s oil production by one million barrels a day while Russia and Kazakhstan were allowed to modestly increase production.

“Saudi Arabia agreed to cut and Russia and Kazakhstan were allowed to increase production. Obviously, it is usual development,” Alexei Kokin, a senior oil and gas analyst at UralSib Financial Corp in Moscow, told New Europe by phone on January 6.

Following the meeting of the Organization of Petroleum Exporting Countries and other major oil producers led by Russia, a group known as OPEC+, the countries participating in the agreement decided to extend the current level of oil production cuts for February and March 2021, Kazakhstan’s Energy Ministry said in a statement. “At the same time, separate conditions were agreed for Kazakhstan and Russia, providing for a phased increase in production in this period by 10,000 and 65,000 barrels per day, respectively. Thus, obligations for Kazakhstan under OPEC+ in February and March will amount to 1.427 million barrels per day and 1.437 million barrels per day, respectively,” Kazakhstan’s Energy Ministry added.

OPEC+ have agreed to meet every month to access the market. “Meeting every month, trying to adjust production every month to sort of keep it under control and essentially to micromanage production is not particularly easy when you have such a large group of producers. It’s either done by consensus, which is very difficult, almost impossible, or it’s done basically by the big guys only – by the biggest and the most responsible members of the organisation – and in which case it’s inevitable that the member which sees the greatest risks also cuts production unilaterally to show that for them it’s a major problem,” the Uralsib expert said, explaining the Saudi willingness to cut production by one million barrels in an effort to stabilise the market.

“In a sense it was inevitable because of the shortened time horizon for new quotas. Because if they have kept the time horizon for half a year, maybe a year, things would have looked differently. There will be more effort to reach a compromise and then stick it to it. And now getting a consensus decision is very difficult which is leading to this unusual – and it might also be leading in the future to kind of unusual decisions,” he said.

On January 5, Brent crude rose past $53 a barrel, and West Texas Intermediate (WTI) exceeded $50. “The traders are quite confident that the OPEC+ deal will continue to work more or less. Maybe not on the long term, not even in the medium term but in the short term it will keep working and then when demand starts to recover and the vaccines are rolled out then the picture will be different. The role of OPEC might be less and will be demand-driven sort of recovery,” Kokin said, adding, “But right now, the market is putting its fate in OPEC+ and Saudi Arabia.

According to the UralSib expert, the greatest strain on OPEC+ will emerge later when demand starts to recover fast and then the market will be adjusting to this increase in consumption. “Then everybody will be opening their taps or trying to open their taps as much as possible – the Americans, Canadians, Brazilians, Norwegians and everybody in OPEC+ will be also trying to get a share of this growing market and that will test their strength,” Kokin said, adding that right now, it is probably a relatively easy test to pass. “The real strains will appear probably at the same time as demand starts picking up which will probably be late spring,” he said.

In his opening remarks, Saudi Arabia’s Minister of Energy and Chairman of the OPEC and non-OPEC Ministerial Meeting, Abdulaziz Bin Salman, reminded that OPEC+ producers not only did they achieve the biggest ever cuts to oil supply, but they also saw those cuts through. “We achieved the highest levels of conformity in the four years OPEC+ has been operating, and for the first time we agreed a mechanism for compensation to make up for any past slippage from our goals,” he said. “Our collaborative approach has helped us go a long way towards rebalancing global oil markets after the shocks of last year. But now, as we see light at the end of the tunnel, we must – at all costs – avoid the temptation to slacken off our resolve. It is true that the arrival of several vaccines against the COVID-19 virus is a very welcome sign. I said before that vaccination would be the single most important factor in bringing about economic recovery, leading to a sustained improvement in demand for oil. We have seen this in the general return to optimism within the market since the first vaccines were authorised late last year. But, at the risk of being seen as a killjoy in the proceedings, I want to urge caution, even in this generally optimistic environment,” Bin Salman said.

The Saudi Energy Minister warned that the level of uncertainty in the world remains high. “Global oil demand is still well short of where it was at the beginning of the year. Demand for transport fuels, in particular aviation fuel, is especially fragile. The new variant of the disease is a worrying and unpredictable development. In many parts of the world, where infection rates have increased worryingly, a new wave of lockdowns and restrictions are being put in place, which will inevitably impact the rate of economic recovery in those countries,” he said, urging OPEC+ oil producers not to take for granted the progress they have made as a group over the past year.

Kokin told New Europe that OPEC+ members are concerned because there are still a few months to go before consumption starts going up rapidly. He predicted that demand would grow in May, June, July and keep going up and by the end of the year. “It may not reach the level of 2019; it may be one or two million barrels per day short. But it will probably go up pretty rapidly sometime in late spring. But until then we still have most of January, we have February, March and we have to live through these months. Especially January and February when demand is not particularly high. Consumption in the first quarter is usually seasonally weak. So, that has to be taken into account because if consumption is weak as production goes up, inventories are not going to decrease very fast and they may actually increase this winter. If this happens, the whole short-term picture for physical oil in the market doesn’t look very good,” Kokin said.

He noted that there is no guarantee against short-term drops back into the $40 per barrel territory. “Maybe $45 which is still not dramatic but undesirable. So, they are concerned in the short term. Obviously, the vaccine looks good, for everyone the outlook looks good but until we get there we are in for potential pitfalls in consumption,” Kokin said, adding, “The trajectory of the recovery process is still unclear so that’s why there is some concern one the part of the more responsible members, Saudi Arabia, Russia and the big guys”.

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