Saudi Arabia’s decision to slice crude oil production in February and March 2021 by 12% reveals a very different strategy from that of 12 months ago when its sudden opening of the taps created a short-term boom in tanker demand
The latest meeting of OPEC+ (OPEC plus Russia and some affiliated producers) was expected to end with oil producers, including Saudi Arabia, agreeing to Russia’s demand that output be increased by 500,000 barrels per day (b/d).
Russia had argued that the cuts agreed previously were harming its revenue and it was losing share to US shale oil producers. A 500,000 b/d increase was at the upper end of what could be agreed and was recognised as a starting point for negotiations.
Saudi energy minister Prince Abdulaziz Bin Salman eclipsed the meeting with the announcement that Saudi Arabia would sacrifice 1M b/d in production during February and March and agreed to Russia increasing oil production by 65,000 b/d in February and by another 65,000 b/d in March.
This will bring Saudi Arabian production down to around 8.1M b/d from a peak of around 11M b/d in March and April 2020 during its dispute with Russia. The surprise cut in production is seen as Saudi Arabia taking action to exert its power over OPEC+.
The Brent crude oil price jumped to US$53/bbl which will reduce demand for near-term crude oil exports while refineries and traders are able to drawdown on cheaper crude oil currently in floating storage.
Demand continues to rise in Asia, especially China, but is threatened by further lockdowns as the new UK-derived strain of Covid-19 coronavirus travels around the world. On the plus side, the vaccine is now in circulation, slowly diminishing the pool of people vulnerable to the disease.
For the tanker market, the Saudi Arabian action will have upset demand forecasts so soon into 2021, and create more uncertainty in the market.
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