Oil prices reached the highest point since February 2020 this week after Saudi Arabia’s surprise announcement at the monthly OPEC+ Ministerial Meeting that it would voluntarily cut an additional 1 million barrels per day from its oil production.
This extra cut – by the only true swing producer in the group – more than offsets the increases in production granted to Russia and Kazakhstan, and is a completely different outcome to that which analysts and industry experts had expected.
Saudi Arabia and Russia – the two most powerful members of the OPEC+ alliance – have been at odds over how to respond to the changing oil market and lowered demand. Russia is concerned that U.S. shale will take advantage of any decrease in production that OPEC+ members make. And it isn’t entirely wrong.
Russia is focused on market share. Saudi Arabia, on the other hand, is focused on price. Although the word “price” is never used. Instead, the phrase “market balance” or “restore balance to the market” is preferred. With Saudi Arabia cutting a million barrels per day, two things are clear:
1. The Saudis senses a slackening in the market, likely due to refinery maintenance season in Asia and a new flurry of lockdowns due to the new more virulent strain of Covid-19, and none of the other producers can afford to (nor are they willing to) reduce production further.
2. While Saudi Arabia remains the most powerful member of OPEC, its power is diluted by Russia. Meanwhile, Russia’s inclusion in the group gives more power to OPEC as a whole.
For Saudi Arabia, this cut will come at a high cost. While prices shot up nearly $3 per barrel, The Kingdom will still lose about $34 million per day with 1 million fewer barrels exported. So for Saudi Arabia, it’s unlikely that it is thinking prices will rise enough to offset the lack of exports.
Rather, it is more likely banking on the fact that prices will actually tank due to even more market saturation if it does nothing. For the oil markets, the thought that Saudi Arabia fears it could get much worse should be concerning.
That Russia was unwilling to reduce production with Saudi Arabia (and was even given license to increase production) shows the newfound power that Russia holds in the oil markets.
No one can afford a repeat of March 2020 when the battle between Saudi Arabia and Russia over production cuts sent oil prices sharply downward. In the game of who will blink first, it appears Russia has won this round.
