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Commodities

New year, same OPEC and its effect on oil prices

Some OPEC members continue to argue that increasing production in the face of weak demand could cause prices to drop.

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Saudi, Russia agree to cut oil by 20 million barrel, Further oil production cut required to keep oil price above $40 in 2020 , OPEC + deal to boost Nigeria’s earnings by $2.8 Billion

There’s a quip I heard recently where someone asked “why did 2020 feel like a losing year, and the answer was because 20-twenty-won (2021). It appears 2021 looks like a winning year for OPEC and her allies as prices have rallied to the highs last seen since February 2020.

This comes as Saudi Arabia shocked the oil markets a week ago by cutting their output significantly amid concerns that new coronavirus lockdowns will hit demand. This generous offer pushed Oil prices nearly five percent.

The news Saudi Arabia would make voluntary oil output cuts of one million barrels per day (bpd) in February and March was a big brother move by Saudi Arabia as most producers were disgruntled with reducing output amidst their respective economies. In a form of encouragement to other members, these cuts would encourage most producers from the group consisting of the Organization of the Petroleum Exporting Countries and allies to help stabilize the markets. Bjornar Tonhaugen, Rystad Energy’s head of oil markets described the move as “the cherry on the cake and the happy hour for the oil markets.”

But what makes the move very surprising was the deadlock that followed OPEC+ talks before Saudi acted. Russia and Kazakhstan, the + IN OPEC+ will be given the license to produce more oil over the coming months under the new deal. Albeit, the confusion in OPEC policies. On what premise are Russia and Kazakhstan given these special quotas? This is probably Saudi Arabia trying to avoid any rift like what we experienced in 2020.

The Saudi Minister said “We did not ask any country to come forward and do any cuts, we do this to support our economy and the economies of our fellow producers”

“It is indeed quite shocking that Riyadh is proposing to cut its output, as it could effectively mean that it is willing to forego market share,” said Bjornar Tonhaugen, Head of oil market research at Rystad Energy. The big brother role Saudi plays shows why Saudi Arabia is more than making up for Russia and Kazakhstan as they both increase output.

OPEC initially failed to agree on production levels for February during a meeting early this year. But new variants of the coronavirus look to be more transmissible and have been detected in many of the world’s biggest economies, raising fears that governments have to act faster. 2.2 million people have died from the coronavirus and over 100 million people have been affected. Given the concerns with the vaccine effectiveness, distribution, right to dosage, fear about the vaccines, and accessibility especially in Europe, the pandemic may stay much longer.

From the last meeting, most countries in the OPEC+ group supported rolling over production levels from January, but rebel Russia favored another increase of 500,000 barrels per day, according to reports from an OPEC source to CNN Business.

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Sigma Pensions

Now let’s analyze both parties. Here we have the Saudi Minister, Prince Abdul Aziz urged who was, telling delegates that the “level of uncertainty in the world remains high,” and that a new wave of restrictions on activity could harm demand for transportation fuels.

“I urge you today not to take for granted the progress we have made as a group over the past year,” the prince said in his opening remarks. “Do not put at risk all that we have achieved for the sake of an instant, but illusory, benefit.”

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On the other side of the divide, we have the Russian Deputy Prime Minister Alexander Novak who was pushing for an increase of 500,000 barrels per day in February, according to comments reported by Reuters.

Clearly, the OPEC+ group still has divides amongst them. Although all parties come to a consensus at the end, it still shows there are cracks. The last time the group splintered, back in March, a brief but intense battle for market share ensued between Saudi Arabia and Russia that sent oil prices crashing.

Now, increasing production in the face of weak demand could cause prices to drop. But some of the group’s producers are worried about giving up market share to rivals including US shale producers.

Stanbic 728 x 90

What then is OPEC’s strategy for dominating market share?

The dilemma persists because of two things. Does OPEC over flood the market and crash prices which ultimately ruins the profitability of shale producers? The disadvantage of that is countries that have revenue solely dependent on oil will suffer immensely. Will it be for the greater good? It just might be futile as shale producers can find CAPEX (capital expenditure) to run their companies. In the next few years, let’s see what happens with OPEC and how everything would play out.

Dapo-Thomas Opeoluwa is an Investment Banker and Energy analyst. He holds a degree in MSc. International Business, Banking and Finance from the University of Dundee and also holds a B.Sc in Economics from Redeemers University. As an Oil Analyst at Nairametrics, he focuses mostly on the energy sector, fundamentals for oil prices and analysis behind every market move. Opeoluwa is also experienced in the areas of politics, business consultancy, and investments. You may contact him via his email- [email protected]

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Commodities

Oil prices surge over China’s growing appetite for energy

British based contract ticked up by 0.3% to trade at $63.59 a barrel while the WTI futures edged near $60 a barrel.

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Where next for oil prices?, Brent crude futures gained 0.14 to trade at $34.70 at the time this report was drafted, recovering some of its losses earlier in the oil trading session. , Brent crude price fails to remain over $40, concerns over pledge cut strengthens

Oil prices rallied high at the second trading session of the week as data from the world’s second-largest oil consumer’s (China) import growth picked up coupled with rising tensions in the Middle East after rebels from Yemen disclosed that they fired missiles on Saudi’s energy infrastructure.

At the time of writing this report, the British based contract ticked up by 0.3% to trade at $63.59 a barrel while the West Texas Intermediate futures edged near $60 a barrel.

READ: Oil prices soar above $70 a barrel over terrorist attacks on Saudi’s oil station

The world’s second-largest economy recorded impressive gains for last month in yet another boost to China’s economic recovery as global demand gained momentum. Crude oil imports into China surged by 21% in March from a low base of comparison a year earlier.

Stephen Innes, Chief Global Market Strategist at Axi in a note to Nairametrics spoke on the parabolic of the energy market, as oil traders seem to be uninspired on the resurging COVID-19 virus;

“The oil market’s magnetic attraction to the $63 level should tell us much about the near-term outlook amid conflicting signal of new Covid waves coming to shore ahead of what should be a summer gasoline buying bonanza.

READ: Did OPEC+ April fool the oil market?

But overall, this is an oil market that feels completely uninspired outside of a few micro lurches here and there.

Sigma Pensions

Still, positive comments on the US economy from Fed Chairman Powell help to reassure the outlook for oil demand, balancing concerns about the continued spread of Covid-19 in some regions.”

What to expect

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Recent price actions suggest oil traders might hold the $60 a barrel baseline in the near term even if U.S Treasury yields surge while struggling to resolve with what form and fashion the next leg of the reflation trade will take.

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Commodities

Oil prices stay on course as Saudi’s Energy Minister reassures traders

British based oil contract traded at about $63 a barrel while the WTI futures were trading slightly below the $60 price level.

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Crude oil prices slump, as partial lockdowns resume

Crude oil prices remained relatively firm at the early hours of Friday’s trading session as oil traders digested Saudi Arabia’s defense of OPEC+ plans in raising output thereby capping gains.

At press time, the British based oil contract traded at about $63 a barrel while the West Texas Intermediate futures were trading slightly below the $60 price level.

Saudi energy minister Prince Abdulaziz bin Salman recently revealed that there were no pressing concerns of demand/supply dynamics changing gear amid the gradual boost in outputs in an interview aired on Thursday, adding that OPEC+ had all ammunition put in place to change course if necessary. OPEC+ will continue to meet monthly on reviewing the energy market supply dynamics.

READ: Has the Naira been devalued?

Stephen Innes, Chief Global Market Strategist at Axi in a note to Nairametrics spoke on the prevailing market sentiment amid macros pointing to more oil supplies hitting the sensitive energy market and an upsurge in COVID-19 caseloads.

“Positioning is much cleaner, although the market remains directionally long oil. However, the sudden calm and drop in volatility have attracted passive investors back to the fray as the market structure around prompt spreads start to tighten and the dollar begins to roll over.

“Still, the conflicting signals around OPEC+ supply coming back to market amid spiking coronavirus case numbers in India plus parts of Canada as well as Tokyo backtracking into the lockdown Abyss, together with reports linking the UK’s Covid-19 vaccine workhorse to the higher frequency of blood clots, continues to hold the bulls at bay.”

READ: Did OPEC+ April fool the oil market?

Sigma Pensions

What to expect: The most recent OPEC+ agreement on releasing barrels into such present demand was not out of place – suggesting the futuristic price of oil might range between the $60 -$70 price levels with production normalization vs current high excess production capacity taken into consideration.

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