Oil prices peaked in February 2020 this week, following Saudi Arabia’s surprise announcement at OPEC + ‘s monthly ministerial meeting that it would voluntarily cut another 1 million barrels a day from its oil production. This further reduction – by the only true swing maker in the group – far offsets production increases for Russia and Kazakhstan and is a completely different result from what industry analysts and experts expected.
Saudi Arabia and Russia – the two strongest members of the OPEC + alliance – have been at odds over how to react to changing oil markets and declining demand. Russia is worried that the American shale will benefit from any drop in OPEC + production. And it’s not completely wrong. Russia is focusing on market share. Saudi Arabia, on the other hand, is price-oriented. Although the word “price” is never used. Instead, the phrase “market equilibrium” or “restoring market equilibrium” is preferred. With Saudi Arabia cutting a million barrels a day, two things are clear: 1) The Saudis are feeling a weakening in the market, probably due to the season of maintenance of Asian refineries and a new burst of blockages due to the new more virulent strain of Covid- 19 and none of the other producers can afford (nor do they want to) further reduce production. 2) While Saudi Arabia remains the strongest member of OPEC, its power is diluted …