M6 BARRON’S March1,2021
Oil Producers Consider
Next Steps as Prices Rise
M
ajor oil producers will put
their negotiation skills to the
test when they meet to discuss
production levels in early
March. The gathering comes as Saudi Ara-
bia and Russia, two of the world’s largest
producers, attempt to balance rising crude
prices, tightening global supplies and an
uncertain path of recovery for energy de-
mand.
Strength in oil prices may encourage
producers to consider lifting output. The
biggest incentive for the Organization of
the Petroleum Exporting Countries and
their Russia-led allies, collectively known
as OPEC+, to raise production will be the
need to “take advantage of the high-priced
oil,” says Stan Bharti, founder of merchant
bank Forbes & Manhattan.
The pandemic has impacted these coun-
tries greatly due to decreased demand, and
if oil goes higher, “these oil-rich economies
will need to cash out,” he says.
Prices have reached their highest levels
in more than a year, with U.S. benchmark
West Texas Intermediate crude at $63.53 a
barrel on Feb. 25, the highest since May
- Global benchmark Brent was at
$67.04 on Feb. 24, the highest since Janu-
ary 2020. WTI crude is up almost 27%
this year, marking an impressive rebound
from April 20, when it famously dropped
to negative $37.63.
In early January, Saudi Arabia agreed
to unilaterally cut its output by one million
barrels a day in February and March in a
move that would offset higher production
from some allies, particularly Russia.
At the time, OPEC+ also confirmed that
it would ease production curbs to 7.2 mil-
lion barrels a day from 7.7 million, and
reassess output levels monthly, allowing
for adjustments of up to 500,000 barrels a
day in either direction.
The best decision for OPEC+, which
will hold a committee meeting a day ahead
of the key March 4 gathering, would be to
“stay neutral,” says Bharti. “During these
times, OPEC+ nations won’t want to rock
the boat,” he says, adding that prices are
better “than they otherwise would be dur-
ing a global pandemic.”
As Covid cases decline, transportation
demand for oil will increase, and he ex-
pects oil prices to go even higher, to $80 to
$100 a barrel in the next six months. “De-
mand is building and we’ll see a surge in
prices.”
There has been speculation in recent
weeks, however, that OPEC+ will decide to
further curb production cuts, raising out-
put to take advantage of high oil prices.
Supply growth from OPEC+ may mute
any commodity price appreciation that
comes with a return of demand, says
Chris Duncan, director of investments at
Brandes Investment Partners.
Then again, if the group maintains pro-
duction cuts for an extended period and
that results in a strong price increase, U.S.
production is likely to grow, he says. So
OPEC+ would put higher prices at risk if
they decide to lift output, but could lose
market share if it continues to curb output.
“Traders should keep a close eye on a
slow-developing rift between Saudi Arabia
and Russia” as the meeting nears, says
Phillip Streible, chief market strategist at
Blue Line Futures. With Brent prices
“steadfastly above $60, Russia is arguing
it’s time to bring previously cut produc-
tion back.”
If that happens, prices could be hit by
headwinds in the second half of the year,
leaving year-end targets at $65 for WTI
and $70 for Brent, he says. Maintaining
current output cuts, along with a rise in
travel and oil demand as Covid cases de-
cline, could lift WTI to $70 and Brent to
$75 by midsummer.
There are still “outside variables,” to
contend with, Streible warns, such as in-
creasing tensions with Iran, or a resur-
gence in Covid through another variant of
the virus, which could derail the oil-price
recovery.B
By Myra P. Saefong
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