OPEC+ shocks market with oil production squeeze for price recovery

*Saudis Arabia dismiss concerns about inflation, market overheating as Brent crude surges as much as 5.7 percent to $65 per barrel

Alexander Davis | ConsumerConnect

The Kingdom of Saudi Arabia and its OPEC+ allies shocked the international oil market with a decision to keep supply in check.

This measure has been sending prices surging and adding inflationary pressure to the global economy as it emerges from the pandemic, reports Bloomberg.

A year on from the outbreak of a bitter price war that sent crude below zero, the Kingdom showed that its priority is preserving the hard-won oil recovery rather than worrying about tightening the market too much.

Saudi Energy Minister Prince Abdulaziz bin Salman told reporters after Thursday’s meeting, that “I don’t think it will overheat. We suffered alone; we as OPEC+.”

“It’s about being vigilant and being careful.”

The Organisation of Petroleum Exporting Countries (OPEC) and its allies had been debating whether to restore as much as 1.5 million barrels a day of output April 2021. From trading houses in Geneva to Wall Street banks, much of the oil world was in agreement that global markets could use some more barrels to temper a rapid run-up in prices.

But after being urged to “keep our powder dry” by Prince Abdulaziz, OPEC+ members agreed to hold steady at current levels ─ with the exception of modest increases granted to Russia and Kazakhstan.

Saudi Energy Minister further said the additional 1 million barrel-a-day voluntary production cut the kingdom introduced last month was then open-ended.

That means the cartel will still be withholding about 7 million barrels a day from the market, equivalent to about 7% of global demand, even as fuel consumption recovers in many countries.

Amrita Sen, Chief Oil Analyst at consultant Energy Aspects Limited, in London, said: “OPEC+ definitely risks over-tightening the oil market,” as Brent crude rose as much as 5.7% in London.

Inflation Risks

Brent has already rallied about 30% this year to $65 a barrel as of Friday morning. Throughout the first quarter, OPEC+ has kept production below demand in order to drain the glut that built up during the worst of the COVID-19 lockdowns.

Without additional supply, that deficit will widen significantly in April, according to the cartel’s internal estimates.

Ann-Louise Hittle, Vice-President of macro oils at consultant Wood Mackenzie Limited, stated: “We expect oil prices to rise toward $70 to $75 a barrel during April,” “The risk is these higher prices will dampen the tentative global recovery.

“But the Saudi Energy Minister is adamant OPEC+ must watch for concrete signs of a demand rise before he moves on production.”

Meanwhile, strengthening economies, the rollout of Coronavirus vaccines and continued government stimulus are among the reasons financial markets are anticipating acceleration in price growth, although such forces are countered by weak labor markets.

“We should closely monitor to avoid overheating of the market,” said Russian Deputy Prime Minister Alexander Novak in an interview with state TV Rossiya 24 after the meeting.

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