OPEC, Russia send oil price surging with deal on output
FRANKFURT, Germany — Oil surged to the highest in nearly two years after the OPEC+ alliance surprised traders with its decision to keep output unchanged, signaling a tighter crude market in the months ahead.
Caution about the pandemic took the upper hand Thursday at a meeting of the OPEC oil cartel and allied countries, as they left most of their production cuts in place amid worry that coronavirus restrictions could still undermine recovering demand for crude.
Many analysts had expected a small production increase as the price of oil has risen 30 percent since the start of the year on hopes that the pandemic will ease, allowing for an economic rebound that should increase energy consumption.
Instead, the group of oil producers opted for caution, and their decision in favor of supply restraint quickly sent crude oil prices even higher. The U.S. contract, which had plunged below zero last year as the pandemic restrictions on businesses devastated demand for energy, jumped about 5 percent on the day to over $64 a barrel.
OPEC countries led by Saudi Arabia joined with other countries including Russia to reach the deal in an online meeting Thursday.
Futures in New York climbed 4.2 percent, rising the most since Saudi Arabia last shocked markets with its January pledge to unilaterally cut output. Global
benchmark Brent also jumped on Thursday. Saudi Arabia said it is in no hurry to bring back supply and will maintain its 1 million barrel-a-day voluntary production cut.
“The decision to maintain the current OPEC+ supply cuts for the month of April has given the oil bulls exactly what they needed as far as the tight-supply narrative goes,” said Ryan Fitzmaurice, commodities strategist at Rabobank. “The Saudis shrewdly recognized that in order to maintain the recent upward price momentum and speculative buying interest in oil futures, they needed to ‘feed the bull.’”
Most significantly, Saudi Arabia will keep one million barrels per day in voluntary cuts least through April. Energy Minister Abdulaziz bin Salman said they would eventually and gradually be withdrawn over the next few months depending what the market requires, without specifying when or under what conditions.
Bin Salman called it “a good decision and a surprising decision” and noted that the group “had to disappoint those who speculated about what we would do.”
Russia’s deputy prime minister, Alexander Novak, expressed “careful optimism” that the oil market was stabilizing. Under the deal, non-OPEC countries Russia and Kazakstan can make small production increases. The group will continue to meet monthly to review production.
The so-called OPEC Plus group — which includes countries like Russia that are not part of the cartel but have been coordinating production in recent years — made deep cuts in output in 2020 to stave off a collapse in prices.
As more economic activity returned around the world, the group decided to add back 500,000 barrels per day in December. Saudi Arabia in January voluntarily cut 1 million barrels per day, supporting markets for crude oil.
While Saudi Arabia has been more cautious about production increases, Russia has been a reliable advocate for more supply. One factor contributing to differences is that Russia can balance its state budget at lower oil prices than can Saudi Arabia, according to the International Monetary Fund.
The cost of crude oil makes up half the price of a gallon of gasoline for U.S. drivers, but the key factor in recently higher U.S. gas prices has been the February storms that have taken refineries offline, tightening supply. The national average was $2.74 a gallon on Thursday, up more than 30 cents from the beginning of February.
The rally in crude prices that’s helped send fuel prices soaring is being compounded by refined product supply declines in the U.S. after a deep freeze paralyzed much of the Gulf Coast refining sector late last month. Gasoline futures in New York climbed above $2 a gallon on Thursday before settling just under the key level.