Saudi output cut drags oil market into supply deficit in 1Q

By S BIRRUNTHA / Pic AFP

THE decision by Saudi Arabia to unexpectedly cut crude oil output by one million barrels per day (bpd) for February and March this year is expected to flip the market back into a supply deficit in the first quarter (1Q) of 2021.

OCBC Treasury Research economist Howie Lee noted that the kingdom is supporting prices with regular intervention and could result in an implicit floor on how low oil prices could correct.

“We see Brent trading mostly in the mid-US$50 (RM200.50) per barrel through this year, although the upper end of our estimates sees Brent trading in the low-US$60 per barrel,” he said in a research note yesterday.

He added that this move will offset the 500,000-bpd crude oil production increase from OPEC+ beginning January 2021 and the marginal increase of 75,000 bpd from Russia and Kazakhstan beginning February 2021.

“The reduction of one million bpd from Saudi Arabia is highly unexpected and is a considerably steep supply curve.

“The oil market reacted strongly, with Brent rising 4.9% to US$53.60 per barrel and the West Texas Intermediate trading above US$50 per barrel for the first time in almost a year,” he noted.

Lee said OPEC+ was supposed to increase output by two million bpd this month according to its initial plan laid out in April last year.

However, he added that the fragile global economic recovery has led the group to just increase output by 500,000 bpd for the month with monthly reviews to be conducted each month to assess the suitability of increasing output.

The bank had expected a consistent increase of 500,000 bpd each month for the next four months, beginning January.

With Saudi Arabia’s decision to cut its output by one million bpd, Lee said the market in the 1Q is likely to flip back into supply deficit of 600,000 bpd from its initial estimate of a 300,000- bpd surplus, even with expectations of a dip in demand arising from the new Covid-19 variant.

Additionally, he highlighted that the one million bpd reduction is nothing to scoff at and it is pure flexing of muscles by Saudi Arabia.

“Saudi Arabia is there to guard the fragile market equilibrium and it will take a lot of guts to bet against this rally.

“More importantly, Saudi’s actions could set a floor on how low prices can correct, as the market is going to anticipate intervention from the kingdom each time prices fall too low,” he added.