Saudi Arabia’s voluntary output cut lends support to Brent, may breach $70 in 2021

Saudi Arabia’s voluntary decision to cut crude production supported prices with Brent likely breaching the $70 mark during the year, Emma Richards, senior industry analyst at Fitch Solutions, told Argaam.

“The surprise cut from Saudi has undoubtedly given a lift to Brent. Perhaps more importantly, it reaffirms the Kingdom’s strong commitment to the OPEC+ deal and continued close management of the oil market,” she said.

In January, Saudi Arabia’s Minister of Energy Prince Abdulaziz Bin Salman announced voluntary cuts to its oil production by additional 1 million bpd in February and March, affirming the move to support oil market and industry.

Oil prices surged to their highest level in 13 months today, Feb. 9, supported by supply cuts by major producers and anticipated demand recovery. International benchmark Brent crude gained 0.9% to $61.08 per barrel, while WTI jumped 0.8% to $58.44 a barrel.

Fitch analyst expected prices to perform better in the second half than the first half of 2021, as vaccine rollouts accelerate and the post-pandemic recovery gains a more stable footing.

“Given where prices are currently, there is certainly scope for Brent to breach the $70 per barrel mark within the course of the year,” Richards stated.

However, she noted that sustaining this price level would likely prove difficult with much depending on the global vaccination program’s speed and efficacy and the accompanying economic recovery’s strength and stability.

Edward Bell, Senior Director, Market Economics, Emirates NBD, admitted that the Kingdom’s voluntary plan to cut an additional one million barrels per day (bpd) in February and March has undoubtedly helped to push Brent prices up to around $60 in Q1 2021.

“Provided that other members of OPEC+ stick to their output targets the additional Saudi cuts will help to drain down inventories substantially in Q1. The big question remains what happens for Q2 and whether OPEC+ countries will maintain their current level of cuts or add barrels back to the market,” he told Argaam.

Brent prices are expected to record an average of around $50/bbl in 2021, Bell said, adding prices will have a more upside potential in the second half of the year.

Michael Hsueh, Research Analyst at Deutsche Bank, said that the Kingdom’s unilateral decision to cut production is obviously quite helpful on a short-term basis but expected the price to remain in line with its quarterly average projections of $60/bbl for Q2 and Q3 2021, respectively. 

“We think prices erring to the upside above our forecasts are more likely than prices erring to the downside below our forecasts,” he said, adding the Q4 2021 quarterly average projection is $65/bbl. 

“We expect Saudi fiscal and current accounts to improve by 2.7% and 4.4% of GDP respectively for every $10 increase in Brent,” Hsueh stated. 

In a recent report, Oxford Institute for Energy Studies pointed out that oil prices rose following the Kingdom’s decision to voluntarily reduce production, despite renewed lockdown measures in several countries.

“The Saudi decision to reduce production confirms its leadership and willingness to work independently when market conditions require it,” the report noted.

OPEC Secretary-General Mohammad Barkindo hailed the decision, saying the Kingdom’s decision to implement a voluntary reduction in oil production levels will help the market navigate seasonally low oil demand in the first quarter.

Ehsan Khoman, Director, Head of Emerging Markets Research – EMEA, MUFG Bank, said that oil prices continue to beat the bank’s “above consensus” bullish expectations.

“A confluence of vaccine optimism, US stimulus, prospects of a weaker US dollar, stern OPEC+ discipline and (US President) Biden’s bullish energy actions is roaring the front-end of the oil curve forward, bringing clear upside risks to our Brent (2021 average $58/bbl; year-end $64/bbl) and WTI (2021 average 454/bbl; year-end $61/bbl) forecasts.”

The sheer velocity of the leg up in oil prices since the turn of the year compels not to rule out Brent and WTI breaching $70/bbl and $65/bbl, respectively, by year-end, as markets continue to carve out new contours of normality towards a post-virus equilibrium, Khoman noted.

According to the Fitch analyst, the recent OPEC+ agreement has also been hugely instrumental in firming up the price recovery.

“The decision to move away from the pre-agreed production schedule in favor of a monthly adjustment to the cut was, in our view, a good one. It allows the group greater flexibility: it

can now react more rapidly to changes in the underlying fundamentals and can better time the re-entry of its cut barrels to market,” Richards said.

“After holding production steady for two months and with vaccine rollouts ongoing and demand expected to trend higher in Q2 (reflecting both the easing of lockdown restrictions and the seasonality in oil consumption), we would expect to see 500,000 bpd of supply brought back in April,” she added.

Deutsche Bank’s Hsueh noted that the OPEC+ agreement is absolutely essential to their expectations for further improvement in Brent prices by the end of the year, expecting a collective 500,000 bpd rise in output agreed for April during the forthcoming March 4 meeting.

In December 2020, OPEC+ agreed to increase production by 500,000 bpd beginning January, bringing the total production cuts at the start of 2021 to 7.2 million bpd.

Write to Parag Deulgaonkar at parag.d@argaam.com