The meeting of Organization of the Petroleum Exporting Countries and allied producers (OPEC+) concluded with an agreement to maintain stable production in February and March as the COVID-19 pandemic continues to push some economies into lockdown.
Additionally, Saudi Arabia said that from February to March, it will unilaterally cut its current crude oil production quota by 1 million b/d. The surprise move comes after an agreement with other large producers earlier in the day to keep their collective output flat.
Meanwhile, Russia and Kazakhstan can produce more oil over the coming months. Russia favored an increase of 500,000 b/d.
US benchmark West Texas Intermediate (WTI) crude futures broke above $50/bbl on Jan. 5.
The deal, despite offering some market stability until the end of March, is not one OPEC members may digest easily, said Bjornar Tonhaugen, head of oil market research at Rystad Energy.
“Balances within the group have become as fragile as ever. Russia and Kazakhstan got away with increasing their output in February and March, while other OPEC members have to bite the bullet.”
Commenting on the decisions by Russia and Kazakhstan to stand firm for an insignificant production increase, drawing out the OPEC meeting to a second day, Bjornar said as the winter turnaround and maintenance season approaches, “the two countries want to avoid shutting-in any additional production for non-maintenance reasons. In Russia especially, shutting off an aging mature well can be a death sentence, as often it is uncommercial to turn back on production.
“The (1 million b/d cut) offer suggests that the Saudis are seeing demand really threatened in the short-term and want to protect prices as much as they can, especially at a time when tensions are flaring again in the region, which creates some unpredictability over price levels,” Bjornar said.
However, “Saudi Arabia’s offer to compensate and voluntarily cut production did not take an official form, it was an offer that was probably meant to be blurry and subject to changes when it comes to the actual cuts when the time comes.”
Outside of OPEC+ dealings, the oil market responded to flaring tensions in the Middle East. Seizure of a South Korean-flagged tanker in the Strait of Hormuz by Iran Jan. 4 creates regional instability and raises questions about the reliability of oil transport in the Gulf oil waterway.