Past confabs among oil-producing nations have caused frictions between price bulls and bears. Part of the reason the Opec+ cartel launched a new monthly format this year was to encourage harmony. Alas, uncertainties about the timing and effectiveness of a new Covid-19 vaccine triggered yet another dispute.
Opec should be happy to hold oil prices at around $50 per barrel. This price earns oil-producing countries a decent revenue without encouraging excessive growth from rival US shale companies.
This week, Russia and Saudi Arabia could not agree on whether to increase the cartel’s production. The market abacus had already tallied an expected half million barrels per day of added supply. But in the event Opec, led by Saudi Arabia, surprisingly decided late Tuesday to slash production by a million barrels, with Russia and Kazakhstan allowed to produce more. This is a significant cut. As of November, Opec countries were lifting 25.2m barrels daily, according to Bloomberg data, a fifth below the five-year average. The Saudi caution stems from fears that the surge in virus cases in Europe and the US in past weeks could delay a rebound in oil demand.
Opec was to meet in a month’s time to resolve the dispute. In the event, both sides should win. Even with the US benchmark West Texas Intermediate trading in the $45 to $55 range, US shale producers — such as Pioneer Resources — cannot generate enough cash flow to drill aggressively, thinks Rystad Energy. Oil markets may have entered a Goldilocks state. While few independent crude producers will cheer these prices, bosses can rest a lot easier than they did nine months ago, when WTI briefly traded below zero. Oil explorer share prices, long lagging the broader market, have bounced back in the past few months.
Traders had expected the Saudi view to prevail. They were right. Oil prices soared on the day. But this resolution of sorts does nothing for Opec+ unity. More meetings will not help the oil bears sleep better.
This article was changed after publication to reflect the deal struck late Tuesday by Opec.