Saudi Arabia and Russia once again on opposite sides

Saudi Arabia and Russia once again seem to be propagating opposite stance prior to OPEC plus meeting scheduled in March. While Riyadh is publicly urging fellow members to be extremely cautious, Moscow is demanding increase in output.

When OPEC plus gathers on 4th March, it will discuss increasing output in April. There will be two crucial decisions.

First, the group as a whole must choose whether to restore as much as 500,000 barrels a day. Second, Saudi Arabia must decide the fate of one million barrels a day of extra voluntary cuts and clearing surplus inventories even more quickly.

The kingdom initially announced this reduction would be reversed in April, but their latest thinking is fluid and the next move hasn’t been finalized. Offering to maintain some part of this voluntary cut in April could give Riyadh a useful bargaining chip if it’s seeking to limit the group’s overall output increase.

Some easing in production restraint is likely at the March meeting. The real bargaining has yet to start and no decision has been pre-baked.

Having differed over the pace of supply increases at the last two ministerial meetings, public comments from Riyadh and Moscow indicate that another debate looms.

Russian Deputy Prime Minister Alexander Novak said on 14th February that the market was balanced. While he hasn’t publicly expressed a policy preference for the March discussions, Novak argued at the last two OPEC+ meetings for production increases.

Acknowledging his stance might be unpopular; Saudi Energy Minister Prince Abdulaziz bin Salman warned his fellow producers against complacency. The group must recall the scars of last year’s crisis and be extremely cautious in its next move, he said.

This year’s 20% rally in crude prices has been sharp enough for major consumers such as India to complain about the squeeze, and for Wall Street banks and trading houses to predict further gains.

Global inventories are falling very fast and are set to diminish sharply later this year, according to the International Energy Agency. Demand for petroleum products that cater to societies working and consuming at home is booming.

After freezing storms in Texas shuttered as much as 40% of US crude production in the past week, the clamor for barrels from refiners in some regions has grown stronger. There’s also the risk for OPEC plus that, once the weather-related disruption in the shale heartlands abates, high prices would provoke a new flood of supply.

At the same time, inventories remain significantly above average levels and the IEA forecasts they could pile up again next quarter. The supply disruption from the US freeze won’t last long enough to cause a shortage.

Prices are still below the levels most OPEC members need to cover government spending. Saudi Arabia’s one million barrels cut is a gift. If an attempt is made to snatch back this gift, prices would decline only.