• OPEC+ concludes agreement, Saudi Arabia reduces oil production on its own initiative
• Due to Russia’s exceptional position, continuation of OPEC+ unanimity is at stake
• Oil price forecasts slightly adjusted; upward price potential is limited
• We do not expect oil prices to rise much further in the short term…
• …and the risk of a downward correction is substantial

OPEC has reached an agreement, but not without a fight

OPEC, together with its partners led by Russia (together OPEC+), has agreed on a new production level for the months of February and March. The consultation in early this month – January – was part of the agreements made in December. At that time the agreement was made to evaluate the market on a monthly basis in order to adjust the OPEC+ production level if necessary. The biggest differences of opinion were again found between Russia and Saudi Arabia.

Prior to the consultation, Russia pleaded for a production increase of 500,000 barrels per day (kb/d). Saudi Arabia indicated it wanted to be more cautious because of the new lockdowns in some countries and the consequences this has for expectations regarding the demand for oil.

Saudi Arabia however, advocated leaving production levels unchanged and even reversing the 500 kb/d production increase in the month of January. Last March, this led to an escalation and the opening of the oil tap. As a result, Brent oil dropped to a level below USD 20/barrel, and WTI even traded at negative prices for a while. However, this time it did not come that far. In fact, the oil price rose after the agreement was reached

The agreement implies the following. The production increase in January remains as it is. Furthermore, oil production will remain unchanged in February and March as well. There are three exceptions to this.

• There will be relatively small production increases in Russia (+65 kb/d) and Kazakhstan (+10 kb/d) in these two months.
• In addition, Saudi Arabia came with a surprise during the press conference. As a sign of ‘goodwill’, the Crown Prince Mohammed Bin Salman indicated that Saudi Arabia will voluntarily and unilaterally reduce oil production by 1 million barrels per day (mb/d) in February and March. The unofficial production target for Saudi Arabia will therefore not be 9.1 but 8.1 mb/d.
• With this reduction in production, Saudi Arabia takes full responsibility for balancing the market as new lockdowns are set and existing lockdowns are being extended in the fight against the covid-19 virus.

Decision sets precedent for future uncertainty

There are three risks in this week’s agreement:

Firstly, Russia is now allowed to produce more. This is supposed to meet the higher local needs due to higher consumption in the winter season. But with 65 kb/d out of a total of more than 9 mb/d it is like a drop in the ocean. However, one consequence of this is that Russia gets an exceptional position in relation to the other oil producers. This new agreement gives Russia a separate status, something that could again lead to resentment among the other oil producers and at the expense of future unity.

Secondly, Saudi Arabia has once again taken firm control with the current decision. The OPEC+ talks may have led to only a marginal increase in production, but not yet another price war in which everyone produces what they want. Yet Saudi Arabia has, on its own initiative, greatly reduced its production. In doing so, it is giving up a percentage of its market share in favour of a higher oil price. On the contrary, the Russians wanted to prevent a higher oil price in order to ensure that oil producers in the US would not get a new incentive to increase production.

Thirdly, we need to ask ourselves what the actual point is of a monthly reconciliation. The idea in December was to evaluate the market on a monthly basis and adjust the production level to the developments on the demand side (with a maximum production increase of 500 kb/d). It is not until the beginning of March that the ministers will again sit down around the digital table. This creates additional uncertainty for the oil market. Can the promised production levels for March still be adjusted, or not? And if so, how much is the current agreement worth?

Consequences for the oil prices

For the coming months, Saudi Arabia’s action has led to a significant downward adjustment of global oil supply. In addition, we see the hope that the economy will pick up again as vaccination programs slowly but surely gain momentum, thereby possibly increasing the demand for oil. As a result, the price of oil has already risen to over USD 55/barrel for Brent and USD 51/barrel for WTI. But can this move continue?

If we look purely at technical analysis, the answer is yes, the price could gain even further. The first serious resistance level is around USD 60/barrel. Only when the Brent oil price drops below USD 46.50/barrel, the positive sentiment will reverse.

All in all, we do not expect the oil price to rise much further in the short term and the risk of a downward correction is substantial.