Saudi Arabia has been successful in creating a maximum positive impact on energy markets at a time of their record collapse amid the novel coronavirus pandemic in 2020.
It also made an effective contribution to expanding policy options against the possible repercussions of the OPEC+ initiatives since April 2020.
According to the Oxford Institute for Energy Studies’ recent report, the full impact of Saudi Arabia’s latest decision to cut its production by one million barrels per day is yet to be determined.
“It will be shaped by a large number of factors including the pace of demand recovery, the cohesion within OPEC+, OPEC+’s next move, and US shale response.”
“These analyses show that the kingdom’s latest decision should be analyzed in terms of market factors without resorting to political explanations,” it added.
They also show that OPEC+ decisions are the outcome of a “constrained” optimization.
One of the key advantages of the latest decision is that it has widened OPEC+ policy options, and this, rather than weakening OPEC+ cohesion, should enhance it during very challenging times, the report noted.
The report’s authors, Bassam Fattouh and Andreas Economou, argue that Saudi Arabia’s decision to cut production was not political – as some have suggested – but rather based on its reading of market dynamics.
In fact, this move offers Saudi Arabia greater flexibility in its future choices and shows its willingness to act independently when market conditions require, they said, adding that rather than weaken OPEC+ cohesion, Saudi Arabia’s surprise cut could end up enhancing it.
The report, of which Asharq Al-Awsat obtained a copy, pointed out that Saudi Arabia took the market by surprise.
While the consensus expectation was for OPEC+ to release the remaining 1.5 million b/d (mb/d) of the tapered cuts to the market by April 2021, the Kingdom instead announced an output cut of 1 mb/d effective February and March.
Since the announcement of the cut, the oil price rallied, despite the reintroduction of lockdowns in many parts of the globe, with Brent trading at above $55/b and the term structure shifting into a deeper backwardation.
Commentators have suggested that Saudi Arabia implemented the cut to boost its credentials as a responsible market manager, while others suggested that the latest Saudi move would result in loss of revenues, even though this could also be seen as an insurance premium against a potential fall in oil prices.
