When OPEC+ unveiled its bold move to tighten crude markets last week, the oil world was united in surprise. But on the merits of the plan, it’s starkly divided. The shock decision, steered by Saudi Arabia, to delay again the restart of oil output halted during the pandemic is being lauded by many as a masterstroke of supply management — and criticized by others as misjudged. Vitol Group, the world’s biggest trader, said price indicators attest that “OPEC+ have control” of the market. Crude’s rally to a 14-month high is shoring up revenues for the cartel, while spurring Wall Street banks like Goldman Sachs Group Inc. and JPMorgan Chase & Co. to bolster price forecasts.
But others warn that the Organization of Petroleum Exporting Countries risks over-tightening crude markets by denying supplies just as demand recovers, sending prices too high.
It could also encourage a new tide of U.S. shale-oil, Citigroup Inc. says, and turn out to be a mis-step as “counter-productive” as last year’s price war. Or the price squeeze could accelerate efforts to find other energy sources, as in India, a critical customer. “Withholding barrels as a means of sustaining the price rally will work,” said Bill Farren-Price, a director at research firm Enverus and veteran observer of the cartel. “But in doing so, the table is being laid for a feast at which the U.S. short-cycle operator will be the guest of honor.”
Riyadh has said the surprise move was motivated by “caution,” as the pandemic continues to menace demand. But it’s also bringing rewards for the 23 producing nations that compose OPEC+.
Oil prices soared on March 4 when the coalition, contrary to expectations, announced that it would refrain from restarting 500,000 barrels of daily output in April, and that the Saudis would continue to keep another 1 million barrels off-line. Brent futures soon hit $70 a barrel for the first time in a year.
That brings prices very close to the levels needed — on paper, at least — by several OPEC+ nations to cover government spending, data from the International Monetary Fund show.
Breaking Even
Oil has rebounded to levels needed by several OPEC+ nations
Source: IMF, Bloomberg data
Note: Brent crude prices as of Thursday, March 11.
OPEC’s measures should also speed up its main stated objective — depleting surplus oil inventories left over during the pandemic. Global stockpiles are set to decline by 58.5 million barrels if the cartel holds output steady in April, according to Bloomberg calculations using OPEC’s data. That’s almost three times the drop that would otherwise have occurred.