Saudis determined to keep crude oil market on a tight leash

Although the OPEC+ decision resulted in immediate oil price gains, the warning shots on the horizon couldn’t be altogether ignored

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Rashid Husain SyedSaudi Arabia is leading the pack on crude oil production management. Russia seems to be following.

Despite murmurs in the oil market of a possible rift between the two countries on the issue of output, the Organization of Petroleum Exporting Countries (OPEC) and their allies in the OPEC+, at their virtual meeting last Thursday, went along the Saudi lines. That meant they opted to maintain their current output levels next month, with small incremental increases from Russia and Kazakhstan.

For the time being, the Saudis appear determined to keep the markets on a tight leash. Crude oil market prices remain crucial to the kingdom’s plans.

To beef up the markets further, during a briefing after Thursday’s meeting, Saudi oil minister Prince Abdulaziz bin Salman hinted that the kingdom’s additional, unilateral one-million-barrels-a-day production cut was open ended and he was in no hurry to reverse it.

At the beginning of the closed-door meeting, the prince emphasized that “the uncertainty surrounding the pace of recovery has not receded,” reiterating that “at the risk of sounding like a stuck record, I would once again urge caution and vigilance.”

During the meeting, the purported differences between the Saudis and Russians on the issue of opening the crude taps were not as evident as they were in February. Russian Deputy Prime Minister Alexander Novak conceded, “the market has not yet fully recovered” from the COVID-19-induced recession, but that “we are now in a much better shape and state of the market than we were just a few months ago.”

And although the OPEC+ decision resulted in immediate oil price gains, the warning shots on the horizon couldn’t be altogether ignored.

The first is the possibility of a resurgence in United States output. The battered and bruised U.S. shale oil industry is finding resurgence in one of the most unlikely places, Bloomberg reported. Private U.S. drillers, once regarded as minor players in the shale industry, held half the share of the U.S. horizontal rig count as of December.

It’s the first time in the modern shale era that small, private players in the U.S. industry have risen to the level of the supermajors, the report added. They now seem on way to spending $3 billion in just the first three months of this year, doubling from their lowest levels of 2020, industry data provider LIUM Data Synthesis reported.

The ambitious growth plans of small private operators present OPEC+ with a wild card. If these operators keep expanding at their current pace over the next six months, they could become a thorn in the side of the OPEC+.

The situation has the potential to crush the market rally engineered by the Saudi prince.

That may result in a market share battle. After all, Russia has been indicating for months that it may not be ready to concede market share to other players, including the shale producers.

As well, the return of Iran to the crude markets remains a possibility. Abdulaziz can’t stay oblivious to that for long. For the time being, and before any return by Iran to the global markets, the Saudi-led OPEC+ appears intent on maximizing returns from crude sales.

A return by the Iranians would impact the overall crude mathematics.

There’s also a rising murmur that the recovery of crude demand to pre-pandemic levels may not be far off.

That remains a big if, especially given the growing global emphasis on working from home. This needs due attention.

The Saudi oil prince needs to weigh the situation beyond today, to medium to long-term outlooks.

Toronto-based Rashid Husain Syed is a respected energy and political analyst. The Middle East is his area of focus. As well as writing for major local and global newspapers, Rashid is also a regular speaker at major international conferences. He has been asked to provide his perspective on global energy issues by both the Department of Energy in Washington and the International Energy Agency in Paris. For interview requests, click here.

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