Saudis triumph in oil market with return of Covid-19 crisis

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When the OPEC + alliance of oil producers meets next week, group leader Saudi Arabia can savor a moment of triumph.

Eighteen months after cutting crude production during the pandemic, Riyadh is expected to pump to near pre-Covid levels of 9.8 million barrels per day this month as a recovering global economy calls for energy supplies .

Moreover, by reducing these shipments slowly enough to avoid a further surplus, Saudi Energy Minister Prince Abdulaziz bin Salman has boosted crude prices to $ 80 a barrel. This lifted the kingdom’s oil revenues to a three-year high, putting them on track for an even bigger payout in 2022.

“OPEC + has had a very good year,” said Ben Luckock, co-head of oil trading at commodities trader Trafigura Group. “They delivered: they managed to thread the needle.

A far cry from the uproar of last March, when falling demand for fuel briefly threw the Organization of the Petroleum Exporting Countries and its partners into a bitter fight for customers. Those bitter memories seem very distant as the network of 23 countries – jointly led by the Saudis and Russia – prepares to meet on Monday.

If there is a threat to the delicate balance reached by OPEC +, it is that the market could overheat and prices rise too high.

The alliance has said it will meet its schedule of modest production increases by approving another 400,000 barrels per day increase for November. But the market has changed since that roadmap was approved in July.

The shortage of natural gas, which has driven prices down to the equivalent of $ 190 a barrel, is pushing towards petroleum products for heating and manufacturing, which is boosting aggregate demand. U.S. oil production is still recovering from Hurricane Ida, which destroyed a total of nearly 35 million barrels after hitting the Gulf of Mexico a month ago, equivalent to almost two full months of increase of the OPEC + offer.

Anxious consumers

The anxiety among the major consuming countries is palpable, especially if they end up experiencing a cold winter. China has asked major energy companies to secure their supplies at all costs. The administration of US President Joe Biden said it reminded OPEC of the need to support the recovery, and National Security Advisor Jake Sullivan met with Saudi Crown Prince Mohammed bin Salman this week.

“OPEC will come under increasing pressure from Washington to open the production relief valve and cap the rise” in prices, said Helima Croft, chief commodities strategist at RBC Capital Markets. “An increase beyond 400,000 barrels per day is a live option for Monday.”

This is a view shared by the world’s largest independent trader, Vitol Group. Not only is demand driven by the shortage of natural gas, but supply prospects are tightening as prospects for a quick deal to revive Iranian exports dwindle, said Chris Bake, the company’s head of origination. .

Tehran and Washington have been involved in negotiations to reactivate a nuclear deal – and lift US sanctions on Iranian oil shipments – but talks have so far made little headway. As a result, around 1.4 million barrels per day of Iranian crude that traders believe could enter the market in late 2021 remain absent.

A bigger boost?

Some OPEC + delegates said privately that the increase approved at Monday’s meeting could be higher than the planned 400,000 barrels per day. Scenarios for larger hikes have been considered, an official said.

The Saudis themselves don’t want to see prices soar to $ 100 a barrel, as excessive fuel costs would reduce demand and spur a resumption of U.S. shale production, according to people familiar with the thinking of the kingdom.

A surge in crude prices – just weeks before world leaders meet in Glasgow, Scotland for a new round of climate talks aimed at moving the world away from fossil fuels – could strengthen support for the transition to renewable energies.

But the kingdom is not yet convinced that the jump in crude above $ 80 in London earlier this week reflects a genuine supply shortage, people said.

OPEC + will likely wait and see if the natural gas deficit “materially” bolsters demand for oil before accelerating the return to production, said Amrita Sen, chief oil analyst and co-founder of consultant Energy Aspects Ltd. the future, but not yet.

–With help from Ainhoa ​​Goyeneche.


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