Opec+ alliance must stay the course in keeping supplies on tight leash to nurse nascent price recovery
OPINION: The Opec+ alliance deserves a pat on the back for overseeing a stellar oil price recovery through record output cuts designed to counter weak demand in the wake of the Covid-19 pandemic.
The cohesion of the alliance — between Opec members and key non-Opec producers led by Russia — will be put to the test at a crucial virtual meeting scheduled for next week, after an earlier date of 4 June could not be met.
The recent oil price rebound has been a hard-won battle, coming after a catastrophic price war between the alliance’s two leading members, Saudi Arabia and Russia, that sent US crude futures crashing below -$40 per barrel at one stage on 20 April.
Historic cuts deal
Sensing total economic meltdown, the world’s two top exporters soon decided to opt for peace, paving the way for the historic 12 April restraint pact that committed the Opec+ producers to slashing their combined output by a record 9.7 million barrels per day in May and June.
The rewards have been evident, with the price of international benchmark Brent doubling in the past six weeks — albeit helped by an easing of worldwide economic lockdowns that crippled energy demand by shutting down air and road travel.
However, a new battle is looming, threatening the fragile price recovery amidst a persistent glut and demand growth uncertainty.
Opec linchpin Saudi Arabia, aware that Brent is 40% below January’s level, is determined to stay the course in continuing with the stringent supply cuts to ensure the group does not lose its grip.
Riyadh, along with regional allies Kuwait and Abu Dhabi, has gone the extra mile by chipping in with added voluntary cuts to sharpen the effectiveness of the co-ordinated cuts.
Persian Gulf players seek consensus
Despite the robust pace of the recovery, more needs to be done to tackle a colossal global inventory build triggered by the pandemic.
The message from the key Persian Gulf producers is that the unprecedented output cuts must not be scaled down any time soon.
The video conference was originally scheduled to take place on 9 and 10 June but was brought forward to 4 June to give the Saudis more flexibility in allocating crude to clients in July. However, it was subsequently put off again until the original dates.
Russian Energy Minister Alexander Novak appears to be of the view that the unprecedented deep cuts, combined with recovering Chinese oil demand, will bring global supply and demand back into balance in June or July.
Novak therefore favours a tapering as agreed in the April pact that envisages a scaling back of the cuts to 7.7 million bpd.
Market experts tend to agree with the Saudi camp that any hasty relaxation can backfire quickly as the demand recovery has yet to take hold — fuel consumption in India is about 40% below last year’s levels, while US energy demand is about 25% lower than at the same point last year.
Yet, despite their differences, Saudi Arabia and Russia are keen to avoid another disastrous conflict. Russia’s President Vladimir Putin and Saudi Crown Prince Mohammed bin Salman held a phone conversation last week to ensure smooth discussions before the latest crucial meeting.
An extension of the deep cuts could push prices to $40 or above, provided the alliance stays the course and resists the temptation of abandoning strict quota adherence as the upward trend gains more traction.
The brief March price war was a bitter lesson that any serious division in the ranks of the alliance could quickly cost it the hard-won price recovery battle.