Saudi Arabia announced a voluntary reduction of 1 million barrels per day in February and March this year, and international oil prices have soared. This news was far beyond the market's expectations, because the previous focus was whether the OPEC+ meeting this week will decide to increase production by 500,000 barrels per day again.
Saudi Arabia’s move to turn the tide has pushed WTI oil prices above the $50 psychological threshold for the first time since February last year. However, its Relative Strength Index (RSI) is currently hitting an overbought level, and oil prices may see a short-term correction.
Brent crude oil prices also reached their highest level since February last year.
The following is a brief review of OPEC+ production decisions since the outbreak of the global new crown epidemic:
April 2020: Starting from May 2020, a record reduction of 9.7 million barrels per day (equivalent to about 10% of global supply) will reduce the impact of the epidemic on demand.
July 2020: There are some signs of recovery in the global economy, and the supply of approximately 2 million barrels per day will be restored from August 2020.
December 2020: Due to the severe counterattack of the epidemic, major economies have adopted stricter lockdown measures. The increase in production in January 2021 will be adjusted from the originally planned 2 million barrels to 500,000 barrels.
January 4, 2021: The OPEC+ meeting was postponed for one day due to the inability of member states to reach a consensus on the level of production in February-the main difference is whether to maintain current output or increase production by 500,000 barrels per day as supported by Russia.
OPEC + internal cracks may resurface
Saudi Arabia's unexpected voluntary production cuts have excited the oil market, but it may also expose the differences and games within the alliance. Saudi Arabia’s unilateral production cuts clearly indicate that the Saudi government wants oil prices to rise, but other oil-producing countries give priority to maintaining market share.
In recent weeks, Russia has been pushing for a plan to increase production by 500,000 barrels per day because of concerns that rising oil prices will cause non-OPEC+ competitors such as US shale oil producers to compete for market share. According to the latest arrangements, Russia will only increase production by 65,000 barrels per day in the next two months. Recently, Nigeria, Iraq, and the United Arab Emirates have also rejected requests to increase production.
In addition, there are moral risks
If Saudi Arabia is willing to shoulder heavy responsibilities for other OPEC+ member states, the willingness of other member states to maintain current output may be weakened. In other words, those member states that have been trying their best to maintain their market share may feel confident because they know that Saudi Arabia will support oil prices by reducing its output.
Conflicting goals (higher prices vs. market share) may expose the vulnerability of OPEC+ alliances. We only need to review the plummet of the crude oil market in March 2020, and we can imagine a split OPEC+ How significant is the impact.
There are two major prerequisites for oil prices to continue to rise to their pre-epidemic levels. First, the global economic recovery must continue. In addition, OPEC+ member states must show the willingness to act together and maintain strict production management. Otherwise, the oil price rebound may only be short-lived.