OPEC members won't easily digest new deal

OPEC members won't easily digest new deal

BAKU, Azerbaijan, Jan.6

By Leman Zeynalova – Trend:

Balances within the OPEC+ group have become are as fragile as ever, Trend quotes Bjornar Tonhaugen, Rystad Energy’s Head of Oil Market Research, as saying.

Russia and Kazakhstan got away with increasing their output in February and March, while other OPEC members have to bite the bullet, he said.

OPEC+ agreed to lift oil production by 75,000 barrels per day over January levels.

But Saudi Arabia’s late announcement after the meeting sent oil prices soaring—that Saudi Arabia would voluntarily cut an additional 1 million barrels per day in February and March above its current quota—all while OPEC’s allies get to ramp up production.

The OPEC+ agreed not only for the production levels for February but for March as well. March’s production level will see an additional increase of 120,000 barrels per day over February levels, or 195,000 bpd over January levels.

With March’s production quotas already set, the February meeting, therefore, will set production quotas for April. The previous meeting held in December adjusted the total production cuts to 7.2 million bpd for January, from 7.7 million bpd before.

“Saudi Arabia put the cherry on the cake and it’s difficult to see how a beast of a 1 million bpd cut is justified behind closed Saudi strategist doors. Saudi Arabia’s offer to compensate and voluntarily cut production did not take an official form, it was an offer that was probably meant to be blurry and subject to changes when it comes to the actual cuts when the time comes. Today’s deal, however, even though it offers some market stability until the end of March, is not a deal that OPEC members may digest easily. Many oil producers whose fiscal budgets depend on oil output are keeping their taps tight, while sub-complying alliance member Russia is allowed to enjoy a boost,” noted the expert.

Tonhaugen pointed out that Russia was allowed to get away with increasing oil production and together with Kazakhstan, it is making the chronically un-compliant OPEC+ members the clear winners of this meeting.

“Why did Russia and Kazakhstan stand their ground for a quite insignificant production increase and draw out the OPEC meeting to a second day? As the winter turnaround and maintenance season approaches, the two countries want to avoid shutting-in any additional production for non-maintenance reasons. In Russia especially, shutting off an aging mature well can be a death sentence, as often it is uncommercial to turn back on production. While it may anger some fellow OPEC members that also want to raise output, such as Iraq and the UAE, the market will probably speculate that slipping compliance may be on the cards, leaving Saudi Arabia with the worst cards on the table,” he added.

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Follow the author on Twitter: @Lyaman_Zeyn

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