Saudi Arabia’s unexpected surprise
The much-watched OPEC meeting finally ended, and the results of the meeting “shocked” the market. OPEC+ decided not to increase production in April, completely shattering market expectations. International oil prices rose sharply in response, taking one step closer to the target of US$70/barrel.
Before the meeting, Saudi Arabia had stated that it might stop its commitment to voluntarily reduce production by 1 million barrels per day. However, after the meeting, Saudi Arabia shockingly announced that it would voluntarily reduce production by 1 million barrels per day. 10,000 barrels per day has been extended to April. After May, Saudi Arabia will gradually withdraw from its voluntary production cut of 1 million barrels per day depending on the situation.
Saudi Arabia has done a good job in managing expectations this time. This means that Saudi Arabia is still determined to stabilize the crude oil market and will not relax its vigilance because the current oil price is relatively high.
The next OPEC+ meeting will be on April 1, and the scale of production cuts in May will be discussed. Because when the “epic-level” production reduction plan was previously reached, OPEC+’s production reduction plan was only until April. In other words, the production reduction plan may not be terminated immediately, but will be re-evaluated based on the current oil price situation.
It is worth noting that only Russia and Kazakhstan were exempted from this OPCE+ meeting. Russia said it would add 130,000 barrels per day in April, and Kazakhstan would add 20,000 barrels per day, for a total increase of 150,000 barrels per day. This is much smaller than the 1.5 million barrels per day increase expected by the market. As a result, crude oil prices rose sharply after the meeting.
The main reason why the market expects Saudi Arabia to resume production is that low oil prices and low production have dealt a huge blow to Saudi Arabia. Judging from the volume of crude oil exports, in the first half of last year, Saudi Arabia’s crude oil exports fell to the lowest value in the past 15 years. Even now, Saudi Arabia’s oil export volume remains at the low level in the past 15 years.
It can be seen from the trend chart of oil prices and Saudi Arabia’s export earnings that there is almost a perfect positive correlation between the two. In years with better demand, Saudi Arabia will export more oil, and in years with better demand it will also push up prices. This is a mutually reinforcing positive cycle process. In years when demand was poor, oil prices plummeted, and Saudi Arabia had to cut production to stabilize the crude oil market. At this time, low oil prices and low production made life extremely difficult for oil-producing countries.
Judging from the trend of Saudi Arabia’s foreign exchange reserves in recent years, Saudi Arabia is still “eating” the dividends brought by high oil prices before 2015, even though oil export revenue has rebounded in 2018. , but in fact there has been no significant increase in foreign exchange reserves. After experiencing the blow of low oil prices in 2016-2017, Saudi Arabia did not increase its foreign exchange earnings in 2018 when oil prices were relatively high. As a result, after low oil prices reappeared in 2020, Saudi Arabia’s foreign exchange reserves fell sharply again.
In fact, Saudi Arabia’s fiscal balance cost can also be roughly calculated from changes in foreign exchange reserves. When oil prices remained near US$100/barrel from 2011 to 2014, Saudi Arabia’s foreign exchange reserves continued to rise. Saudi Arabia’s foreign exchange reserves declined rapidly from 2015 to 2017. During this period, the annual average price of Brent crude oil was US$54/barrel, US$45/barrel, and US$54/barrel. In 2018, Saudi Arabia’s foreign exchange reserves remained basically stable, and the annual average price of Brent crude oil was US$71/barrel, which is far better than the past three years. Therefore, we can infer that Saudi Arabia’s fiscal balance cost in 2018 is approximately US$70/barrel. Saudi Arabia’s foreign exchange reserves remained stable in 2019, when the average annual price of Brent crude oil fell to US$64/barrel. In 2020, except for a slight decline in the first quarter when prices were extremely low, Saudi Arabia’s foreign exchange reserves were able to remain stable in the rest of the year. However, in the second half of 2020, the average price of Brent crude oil was US$44/barrel, which means that Saudi Arabia It took three years for the fiscal balance cost to drop from US$70 to around US$45/barrel.
Judging from Saudi Arabia’s fiscal expenditure balance sheet, the current oil price is enough for Saudi Arabia to maintain its fiscal balance, but US$67/barrel is not Saudi Arabia’s goal, nor is it the end point of the oil price increase. Saudi Arabia’s goals are broader and more ambitious. Even if it loses market share, Saudi Arabia is willing to continue working hard. However, the good thing now is that the “Prisoner’s Dilemma” of global production has not occurred. While OPEC+ is reducing production, U.S. crude oil production has also declined due to various problems. There will not be a situation where OPEC+ reduces production and the United States desperately increases production, at least This is not going to happen any time soon. Therefore, the short-term failure of the “Prisoner’s Dilemma” on a global scale is the main factor that allows Saudi Arabia to let it go, and it is also the basis for Saudi Arabia to continue to voluntarily reduce production.
The scare of US inventories
This week’s EIA data gave the market a big scare. A number of data have set historical records, and the shocking differentiation between refined oil inventories and crude oil inventories has made the market even more chaotic. Among them, U.S. crude oil inventories increased by a recordIt set a historical record, with an increase of more than 21 million barrels; the decline in U.S. gasoline inventories and refined oil inventories set a historical record, with gasoline inventories decreasing by more than 13 million barrels and refined oil inventories decreasing by more than 9 million barrels; U.S. refinery equipment utilization reached The lowest value in history is 56%. At the same time, the United States’ refining input has also dropped to a record low, even exceeding the worst period of the epidemic. The main reason why many EIA data set historical records is that the extreme weather in the United States affected the power supply. The interruption of power caused the decline of crude oil production, and also interrupted the production of refineries, resulting in insufficient production of refined oil products.
Judging from production data, U.S. crude oil production increased by 300,000 barrels last week, returning to a production capacity of 10 million barrels per day. However, U.S. crude oil production data fell by 1.1 million barrels last week, which means that in the next few weeks, U.S. crude oil production still has room for a gradual recovery of 700,000-800,000 barrels per day. Rule out the possibility of a sharp rebound of hundreds of thousands of barrels next week.
Judging from this week’s data, U.S. crude oil production is already on the road to recovery, but refinery operating rates still show no signs of recovery. If U.S. refinery operating rates still do not begin to recover according to next week’s data, it is foreseeable that U.S. crude oil inventories will still increase significantly, and refined oil inventories will still fall sharply. The sharp divergence between refined oil products and crude oil will once again disrupt the market rhythm.
From the overall fundamentals, due to the impact of extreme weather in the United States, U.S. crude oil demand fell sharply in March. At the same time, other Crude oil-demanding countries have also reduced crude oil purchases seasonally, but after April, demand in these countries will gradually recover. Now OPEC still maintains its previous production reduction scale, and the contradiction between supply and demand in the crude oil market has further intensified. Insufficient supply will become the main contradiction in the crude oil market in April.
This OPEC+ meeting mentioned that the market situation will be re-evaluated in April and, if necessary, the production reduction agreement will continue to be implemented. When OPEC+ reached an “epic-level” production reduction agreement last year, the production reduction agreement was terminated in April this year, which means that OPEC+ as a whole is not only exceeding the production reduction, but also extending the production reduction time, unless the price really reaches the target expected by OPEC+.
Judging from OPEC+’s determination to reduce production, unless there are huge changes in the macro market, the crude oil market will still have to be treated with a bullish approach, and the continued tension on the supply side will continue to push oil prices upward. Achieve higher goals! </p
