Saudi Arabia is set to unwind the extra production cuts it pledged last month, increasingly confident that the grand bargain agreed by oil producers in April to reduce supply has restored order to a market thrown into disarray by the Covid-19 crisis. As part of the deal two months ago, the Opec+ group that includes Saudi Arabia and Russia agreed its biggest-ever production curbs of 9.7m barrels a day. The deal ended a price war between the countries and sought to offset a collapse in demand triggered by coronavirus. This month, Saudi Arabia went even further by making additional cuts of 1m b/d to placate US President Donald Trump, as America’s domestic shale industry reeled from the price plunge.
Now, with Brent crude having rebounded from 18-year lows of below $20 a barrel in April to about $40, Saudi Arabia is poised to bring that 1m b/d of production back, according to four people briefed on the kingdom’s thinking. Yet given the uncertainty still hanging over the market, the Opec+ group is expected to agree an extension of its core production curbs for at least one month beyond July, when producers were initially due to start tapering the two-year deal.
A planned virtual meeting of ministers on Thursday was in doubt on Wednesday after a dispute erupted over producers’ compliance with the agreement. The meeting could still take place in the coming days if a resolution is reached, said two people familiar with Saudi Arabia’s thinking. The kingdom’s likely decision to increase production back to about 8.5m b/d in July, from 7.5m b/d in June, highlights the dilemma it faces. Saudi Arabia does not want the production to rebound too quickly, with oil prices still vulnerable to further virus-related drops in demand. Under the original deal, it was meant to be producing 9m b/d by July. But it also wants to secure its market share.
Bob McNally at Rapidan Energy Group said Opec+ nations would come together “relieved by crude’s sharp recovery but bruised by their falling out in March and nauseated by crude’s epic price bust in April”, adding: “They will dial down the drama and aim for a ‘Goldilocks’ outcome, signaling unity and some incremental restraint.”
The oil industry is used to the cartel quibbling over a few hundred thousand barrels, or trying to calculate whether global demand will rise by 1m or 1.5m b/d annually. But the demand shock in March and April was unprecedented, with as much as a third of global oil consumption lost.
Monitoring supply cuts of about 10m b/ d, on top of production lost from producers in North America outside the Opec+ group, leaves oil ministers struggling to build up an accurate picture of just how much crude the world needs in the second half of this year.