For Saudi Arabia, bad news on the oil market has rarely been such a justification.
Two weeks ago, the world’s largest crude exporter stunned energy traders by announcing that – rather than re-establishing halted production as planned – it would cut supplies by an additional million barrels per day.
The resurgence of the pandemic has required “preventive” action to protect oil recovery, the kingdom’s Energy Minister Prince Abdulaziz bin Salman said. This went against the view of Saudi OPEC + ally Russia, but since then there has been ample evidence that Riyadh made the right choice.
On Tuesday, the International Energy Agency slashed forecasts for global first-quarter oil demand as countries scrambled to contain further outbreaks of the coronavirus. China, which has fueled the crude recovery so far, is once again locking down cities and discouraging travel during the Lunar New Year holidays.
“It will take longer for oil demand to fully recover as new lockdowns in a number of countries weigh on fuel sales,” the Paris-based IEA said in its monthly report.
Oil prices have risen about 9% since the Organization of the Petroleum Exporting Countries and its allies surprised the market on Jan.5. One day. Instead, most of the group have postponed the return of halted production, and Riyadh has said it will make a further cut in February and March.
Brent futures soared above $ 57 a barrel last week, the highest in nearly a year. This has relieved the depleted coffers of OPEC + members, including Saudi Arabia, which needs prices far above current levels to cover government spending. Oil revenues earned by the cartel fell 46% to an 18-year low of $ 323 billion last year, according to the US Energy Information Administration.
These financial gains are not without risks, namely that the Saudis could tighten the market too much. If the rally encourages a flow of new supplies from American drillers and other rivals, the kingdom’s further cuts would have backfired. Much of the shale oil production is profitable at current prices, according to IEA executive director Fatih Birol.
Moscow’s support for further production increases was partly motivated by fears that any supply shortfall left by the OPEC + cuts could be filled by rivals. This is why Russian Deputy Prime Minister Alexander Novak tried to dissuade Prince Abdulaziz from making his further cut at the January meeting.
Signs of weakness
So far, evidence from the oil market has validated the kingdom’s preventive action.
In India, sales of diesel – the country’s most widely used fuel and an indicator of economic health – fell 6.6% in the first half of January compared to the same period in December and 3.5% per compared to the previous year, according to people familiar with the preliminary data. Sales of gasoline, jet fuel and liquefied petroleum gas also declined.
In Europe, road use in the UK, France, Italy and Spain was down 37% in early January from pre-pandemic levels, according to data compiled by Bloomberg. Excluding end-of-year holidays, it is the lowest since June.
The erosion of the recovery in demand, driven by new lockdowns to control the spread of the new highly contagious variant of Covid-19, is reflected in key price indicators. The premium of Brent contracts in December 2021 over those a year later, indicating tight fundamentals, reached its highest level since 2018 in the days following the OPEC + meeting, but declined by 20% last week to $ 1.76 a barrel.
With the additional Saudi brakes, oil stocks are set to decline steadily in the first half of the year, wiping out much of the surplus that has built up in the first months of the pandemic year. last, according to the IEA.
“We all agree that the recovery is fragile,” OPEC Secretary General Mohammad Barkindo told a conference on Tuesday. “But we are cautiously optimistic that the recovery will materialize this year.”
The supply gap will worsen in the second half of the year as the vaccine rollout revives economic activity, giving Saudi Arabia and the other OPEC + countries the opportunity to turn on the taps. This would herald a turning point for the alliance – the reward for years of sales sacrificed to support the market.
“It will probably take a lot more oil,” the IEA said. If shale drillers remain docile, “OPEC + could start to reclaim the market share it has steadily lost to the United States and others since 2016.”
(Updated with OPEC Secretary General’s comments in paragraph 15.)
– With the help of Alex Longley.