Oil gains on Saudi Arabian voluntary output cut

"Oil prices are extending their gains from yesterday’s shocker OPEC+ meeting, as traders digest the implications of Saudi Arabia’s new year’s gift to fellow oil producers and investors.

Instead of an increase in crude production from the alliance in February, the group will now collectively cut production from current January levels – all thanks to Saudi Arabia’s voluntary unilateral cut of 1 million bpd for February which they will keep also for March.

Part of the reason this decision was so surprising is the harsh rhetoric of Riyadh towards sub-compliers.

One can only wonder what exact back-door deals have been made, but it is no surprise that Russia would not be cutting or even keeping production steady into the winter months, as cuts to operations of the country’s old mature wells and fields would create lasting damage to its production capacity.

We guess the other countries who agreed to keep production targets steady (instead of increasing), are fairly satisfied given that the “Saudi put” was firmly offered again, protecting the downside in crude prices on everyone’s behalf.

But expect slipping compliance from several countries hungry to regain market share, especially capturing the growing needs of Asia’s energy demand recovery.

What does this actually mean for crude balances in February and March? And are there participants of the market that are unhappy? The target production of the group actually falls 925,000 bpd m/m in February, and thereafter increases by the marginal 75,000 bpd in March as Russia and Kazakhstan are allowed to ramp up, while KSA keeps its 1 mmbpd cut.

This reduction should likely be enough to turn the February and March crude balances into deficit, which is exactly what Riyadh seeks to achieve.

The stock draws can occur even during the weak refinery demand season for these two months, ahead of the summer recovery season of refinery demand.

But refineries are already balking at the Saudi surprise, questioning the reasoning as margins are already squeezed. A higher crude flat price does not help.

So the question is now again what the demand side of the equation will be able to absorb, as vaccination programs are underway but behind schedule many places, while the second wave roars its ugly head.

The market is not putting too much emphasis on the Georgia Senate election, but a Democratic win will change the playing field in a positive direction for the Biden-administration.

US shale producers also highly welcome the Saudi gift, helping create a firm floor under prices for now.

Expect to see upside surprises to shale output for the third cycle in a row, which is the ever-lasting dilemma of Saudi oil market balancing.

It’s difficult to have the cake and eat it too, as the door is getting more opened up for competition."

Read the article online at: https://www.oilfieldtechnology.com/special-reports/06012021/oil-gains-on-saudi-arabian-voluntary-output-cut/