High Energy

If you were already bullish on oil and maintained a bullish bias headed into this week’s OPEC+ meeting, consider yourself vindicated.

The cartel and allied producers won’t raise output after all, with the exception of two small allowances (Russia and Kazakhstan will pump 130,000 and 20,000 barrels more per day in April). On top of that, the Saudis will extend their unilateral cut into a third month.

Taken together, that appeared to count as the most bullish possible outcome. Crude reflected as much, rising to the highest in more than year.

Traders got a preview of what to expect when Prince Abdulaziz bin Salman “urged caution and vigilance” during Thursday’s video conference.

“Let’s be certain the glimmer we see ahead is not the headlight of an oncoming express train,” he mused, effectively signaling the Kingdom isn’t in a rush to stumble into another boondoggle like the one the market witnessed this time last year when prices collapsed into a pestilent abyss amid an ill-timed price war with the Russians. Later, he said Riyadh is “in no hurry” to bring back the 1 million barrels it pulled of its own accord.

The decision (or, perhaps more aptly, the indecision) opens the door for the market to tighten further.

“Due to the global rollout of inoculation programs, the demand side of the oil equation is healthy going forward,” PVM’s Tamas Varga said Thursday, prior to the decision. “As far as the supply side is concerned, unless there is a serious disagreement between member countries on how to edge towards achieving oil balance, inventories are widely expected to deplete for the remainder of the year, only the speed of this depletion needs to be determined by the producer coalition.”

“Saudi Arabia is essentially back in the driver’s seat because of its surprise unilateral action in January,” RBC’s Helima Croft wrote, before delivering what now seems like a prescient punchline. “And yet, given his repeated insistence that it is a futile exercise to predict Saudi action, we think His Royal Highness may look to cement his reputation as the Prince of Plot Twists.”

I don’t know if Thursday’s news counts as a “plot twist” (I assume Croft will tell us later), but it certainly counted as bullish for already buoyant energy shares, which exploded higher stateside as the headlines were digested by the market.

With Thursday’s “princely” gains (sorry), energy stocks were on track to rise more than 7% on the week (figure above).

This would mark the fifth consecutive weekly rise.

I suppose the OPEC+ outcome is also relevant for breakevens, although some argue they overshot a long time ago. Whatever the case, this is just another reason to think the reflation narrative has legs. At least for another month.

OPEC Statement

14th OPEC and non-OPEC Ministerial Meeting

No 08/2021
Vienna, Austria
04 Mar 2021

The 14th Meeting of OPEC and non-OPEC Ministers took place via video conference on Thursday March 4, 2021, under the Chairmanship of HRH Prince Abdul Aziz bin Salman, Saudi Arabia’s Minister of Energy, and Co-Chair HE Alexander Novak, Deputy Prime Minister of the Russian Federation.

The Meeting welcomed the appointment of HE Mohammed Al-Fares, Minister of Petroleum of Kuwait and the return of HE Mohamed Arkab, Energy Minister of Algeria.

The Meeting emphasized the ongoing positive contributions of the Declaration of Cooperation (DoC) in supporting a rebalancing of the global oil market in line with the historic decisions taken at the 10th (Extraordinary) OPEC and non-OPEC Ministerial Meeting on 12 April 2020 to adjust downwards overall crude oil production and subsequent decisions.

The Ministers noted, with gratitude, the significant voluntary extra supply reduction made by Saudi Arabia, which took effect on 1 February for two months, which supported the stability of the market.

The Ministers also commended Saudi Arabia for the extension of the additional voluntary adjustments of 1 mb/d for the month of April 2021, exemplifying its leadership, and demonstrating its flexible and pre-emptive approach.

The Ministers approved a continuation of the production levels of March for the month of April, with the exception of Russia and Kazakhstan, which will be allowed to increase production by 130 and 20 thousand barrels per day respectively, due to continued seasonal consumption patterns.

The Meeting reviewed the monthly report prepared by the Joint Technical Committee (JTC), including the crude oil production data for the month of February.

It welcomed the positive performance of participating countries. Overall conformity with the original decision was 103 per cent, reinforcing the trend of aggregate high compliance by participating countries.

The Meeting noted that since the April 2020 meeting, OPEC and non-OPEC countries had withheld 2.3bn barrels of oil by end of January 2021, accelerating the oil market rebalancing.

The Meeting Extended special thanks to Nigeria for achieving full conformity in January 2021, and compensating its entire overproduced volumes.

The ministers thanked HE Timipre Sylva, Minister of State for Petroleum Resources of Nigeria, for his shuttle diplomacy as Special Envoy of the JMMC to Congo, Equatorial Guinea, Gabon and South Sudan to discuss matters pertaining to conformity levels with the voluntary production adjustments and compensation of over-produced volumes.

In this regards the Ministers agreed to the request by several countries, which have not yet completed their compensation, for an extension of the compensation period until end of July 2021.

It urged all participants to achieve full conformity and make up for pervious compensation shortfalls, to reach the objective of market rebalancing and avoid undue delay in the process.

The Meeting observed that in December, stocks in OECD countries had fallen for the fifth consecutive month.

The Meeting recognized the recent improvement in the market sentiment by the acceptance and the rollout of vaccine programs and additional stimulus packages in key economies, but cautioned all participating countries to remain vigilant and flexible given the uncertain market conditions, and to remain on the course which had been voluntarily decided and which had hitherto reaped rewards.

The Ministers thanked the JTC and the OPEC Secretariat for their contributions to the meeting. The next meetings of the JMMC and OPEC and non-OPEC Ministers are scheduled for 31 March and 1 April 2021, respectively.


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4 thoughts on “High Energy

  1. Not only is this good for those who are long crude, but this should provide cover for the shale producers in the US the oil sands in Alberta. It also means a bit less stress on the HY debt financing No Am players.

    1. Frackers in west Texas must be dancing in the streets….and their bond holders.
      Completion of a lot of the wells will commence soon.

  2. The stock bond correlation seems to be quite positive here. Does that have a read through on VAR and if not yet, when?

  3. I went to a seminar not long ago (2 years ago- a lifetime it seems now). At that time the statistics for the standard deviation for brent crude was $38 per barrel annually. I do not know what the standard deviation for physical crude is now- but that gives you an idea about volatility in this sector. That is why there are analysts calling for $100 barrel crude. I do not agree, but it is surely possible.

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